I do know that some investors short a stock they buy in order to protect their investment
Doc,this is called a box short. if you own x amount of shares and then sell short the exact same number of shares.Does not matter if the price rises or lowers,the shares you own and the ones you sold short(didn't own), offset each other in the same exact amount.
Here's a post on the subject: Also 30 more posts for a good read/learn at the link below ---------------------------------------------------------------
Posted by: mide In reply to: lowtrade who wrote msg# 4183 Date:7/28/2005 7:30:18 PM Post #of 4193
Low...You are just trying to coax a tome outta me. Okay you get one:
I thought I was being clear about how I play stocks now in all my previous posts....but I guess I was a bit elliptical, so I'll correct that.
Some history is in order first. Daytraders actually created the popularity of "boxing" positions back when I was one in 1999-2001 on a fairly regular basis. They (we) were the pioneers that started it to success and subsequently drew the attention of funds that decided that it should be called "Hedging" one's bet. Thus Hedge funds were born, off the backs of the independent daytrader boom and bust. The funds took our early rudimentary lead and subsequently refined it to a science that baffles retail to this day. It's really elegantly simple.
A true "Box" is a neutral position. You can not lose or gain any money...per se. What it does is allow you to "lock" a long profit position at a top. Subsequently, when the "Box" is lifted, hopefully after stock sinks (quite common in 2000), you then can use the proceeds from the box short to either bank the funds, thus lowering your effective "nut", or add more shares.
I believe the term "BOX" comes from this....you are shorting exactly the number of shares you hold long at some point, effectively 'boxing in' or locking in the profits you made on that stock at that point of execution.
An example:
I own 1000 shares of GTE. It is now at $4.00. I bought them at $1.00. I have a paper profit I don't want to mess with for tax and long term objectives of $3.00. I do not like technicals and broad market pressure and company timelines...whatever.
I decide to short my own 1000 shares at $4.00. That's the "BOX". Now if the stock dives to $2 and then turns...I still have a $3 profit! The math:
1) Orig 1000 shares at $1 (Cost $1,000)
2) PPS at $4 (Value $4,000)
3) Sell short 1000 shares (Cost $0 )
4) Profit locked at $4 ($3,000)
5) Stock drops to $2 Long value loss (-$2,000)
6) Stock drops to $2 Short value gain (+$2,000)
So at $2 you still own a stock with $3,000 of profit in it at this point....a totally "neutral" position on a stock that dropped from $4 to $2! You locked that profit in at $4 with your "BOX" short! Now it can go the other way..up from $4 and in that case you lose those gains from $4 as well....but you never lose the $3 gain!
Now back to my example. You now, based on gut, TA or FA, decide to close the "BOX" out. You simply rebuy, or cover your short stack. Now you have $2,000 in cash and you have at $2 a $1,000 paper profit on your original buy. What to do?
Three choices:
1. Nothing. If it goes back to $4 you now have $2,000 cash and $3,000 in paper profits again...all of this off of a $1,000 original investment (commissions aside or tax stuff). a 500% asset increase. (Looking at it from a cost view..you own the stock at - $1,000.)
2. Buy 1000 more shares at $2 with your cash gains and double your holdings so when it gets to $4 again you now have $3,000 off first 1000 shares and $2,000 off the second 1000 shares paper profit.
3. Or some variation on the two above.
In my opinion, the hedge boys do all of the above constantly. As you can see it is quite profitable with even tiny moves in a stock. Then they layer on the naked stuff during the day with swaps (borrowing cover shares as needed) and they raid retail unprotected shares bought in cash accounts vs. margin accounts...Type 1 vs Type 11 accounts to short.
This is how the game is played everyday,and you can thank retail daytrader pioneers for teaching the class 101 in this 5 years ago. I remember the first poster on a stock board I was on at Yahoo, who posted a day trade in 2000 on a rapidly declining stock. He announced he boxed his shares short and made a profit. He was booed off the board and hounded as a charlaton.
"Box" shorting is smart and is a "Neutral" position. It says nothing about the executors intent regarding a long or short opinion the fundamentals of the stock or company.
It says everything about the executors intent to preserve capital to stay in the game.
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