Gaining an edge in current shorting rules

[options]

So. We have UK banking and financial shares being propped up by laws that will basically stop them from 'going under'. Leaving aside the ethics either way for a moment. What we should be looking at is how can we make money out this situation?

32 listings are on the IG web site that you cannot short. Logically, buying these shares then you cannot lose. Or could you?

What about buying the shares that are almost rock bottom? Scoop up a few and just hold until the price goes up? They're a few listed going for the bargin price of less than50 quid.

Bradford and Bingley around 28.50.
European Islamic Investment bank. Going for less than 6p a share. (What a bargin).
And London Scottish Bank plc. Also going for less than 6p. (Double bargin).

The shorting rule stays in force until 16 January 2009. So running out Monday morning and buying bucket loads, holding until the day beore the rule lapses ('cause you know when it comes off the are going to fall like a stone) seems like a good plan.

As always, do your own due dilligence. They are cheap for a reason. Given that they are weekly charts. How long would you have to hold them before they climbed back up to a reasonable level? No one knows. Chances of a rapid climb to the skies? Unlikely.

What will probably happen is if they attain a reasonable level. The first area of resistance they run into is a very good area where those that bought and held many months ago, may take that first resistance spot as a good place for them to offload because they are offered a respite from the pain.

Only unusual buying activity (lots of it), has any chance of lifting these stocks.

Not looking too good for that idea then.
What about buying the higher priced shares then?

Admiral Group PLC. Trading around 995 a share. Doubled in price since Jan 2006.
The chart says, Hey, nice climb. But look at the large sideways channel it is in? And much inclined to meet major resistance selling at the 1000 mark.

Still, getting better though.

What about buying something that is already in an up trend and has a fair chance of carrying on? Better choice yes.

Rathbone Bros (RAT) 1,095 per share. Resistance at 1,100, which it is already at. Clearly broken out of it's down channel. With much better consistant buying volume coming in. Less chance of people already holding this stock rushing to off load it. Perceived possibly as a better 'value' stock to hold.

I'm not advocating buying as much as you can on Monday morning. (For one thing it has the resiastance to deal with). What I am saying is that cheap isn't always a bargin it may first appear to be.

Charts and fundamentals will tell you most of the story.

 

[MrGecko]

interesting Idea Options...

My view is that the opportunities to profit from these "non-short" shares lie in the options markets... just because the shorting of a share isn't permitted, that doesn't mean that the downwards pressure on the stock is negligible - those that do own it may still have to lower price in order to attract buying interest...

... rather, two ideas strike me as being worth further investigation (if you understand the equities market that is)...The Non-short rule, IMO, may lead to the following opportunites:

* Increased activity in the Put options - as the "short route" has been taken off the table, some traders will be looking for other ways to profit from a falling stock, the most obvious being to Sell calls and Buy puts. If there is sufficient supply and demand respectively, market dynamics may see these contracts trade at a discount / premium

** Volatility trades... The restriction of shorting shares should certainly see the stock behave in a different manner...

[what this may be, I can't say, because I don't know d!ck about equities markets. But, one would have thought, the realised volatility of the stock will deviate from it's historical norms - either the lack of short sellers leads to reduced activity in the stock, and less volatility (bear in mind the purpose of forbidding it in the first place, to introduce stability to the markets); or, it backfires, and because there are no short sellers the stocks are able to deviate from "fair" market value. I can't say which]

... Moreover, as you mentioned the stocks will be eligible for short sale on 16th january, which one would expect to bring increased volatility; ergo, the most sensible trade to me seems to be a long volatility calendar spread; taking the view that volatility will decrease throughout the remainder of the year, then rocket up as short trades are permitted again.

... how to construct such a trade?? selling an ATM straddle, then buying a further expiry Straddle with premium recieved i guess is the basic idea, but i reckon there will be more efficient ways to do it... maybe a simple calendar spread will do the job...


One last thought; these short restrictions only apply to financials (with a few exceptions), right? maybe there is a trade in spreading the volatility between sectors, say Financials and Defense/Healthcare/Technology/retail or whatever... one for you equities boys to think about.

 

[Trader333]

Logically, buying these shares then you cannot lose. Or could you?

Of course you can lose. It is not Short selling that causes prices to fall but a lack of buying support. If no one is prepared to buy at the current price then it will fall. Most of the falls we have seen are not a result of people Short selling and all the ban will do is reduce liquidity and make it more difficult to get out of a position that you are in. It will be interesting to see what happens but even on Friday with the ban already in place HBOS moved from £2.40 to below £2.00 at one stage which is a 20% fall and that was not due to any Short selling.


Paul

 

[Glenn]

The shares on loan for shorting in these instruments was less than 3% - hardly a big number and certainly not enough to drive them down a lot.
Buying them presents one other risk, the main one. Whilst they cannot be shorted, existing holders can still sell them ! ..and get into Cash, Money markets, Gilts etc... which is what they have been doing and is the main cause of the falls.

Glenn

 

[fibonelli]

Hi Options,

You could *short the sector ETF or sector synthetic at some stage. Another option would be to look at the sectors which are dependant on the sector eg Housebuilders, Retailers etc.

The main issue is that unless short covering can be replaced by investment buying, I think there is a reasonable chance in the near future of a gap down or a continual move down due to a vacuum in demand (aka "no bid").

The absence of short sellers means that the securities on the list will not benefit from the stabilising influence of short covering.

*obviously assuming you can do this!

 

[options]

Excellent replies gentlemen.

One of the reasons why I thought of the thread apart from discussing a value way to trade the shorting restrictions, was the 'expert' down the pub.

Everyone knows this bloke. He is bound to have told people that because of the shorting ban, stocks cannot go down, so now is a great time to buy as much as you can get your hands on. He could even have missed the fact that only certain stocks are subject to the rule and is saying that any stock you buy can only go up!

He must know what he is talking about because his friend of a friend, who used have a m8 who knew someone who used to work in a brokers office in the 'city' (cleaning it). Used to get tips off the lady that used to work there. (The one that went round at tea time).
And that's how all these city types work isn't it. All grape vine wink, wink stuff.

So it's for the guy that is going out on Monday morning and buying bucket loads of Astra Zenica and Marks and Spencer!