Whoever told you that shorting stocks profitably over the long term is easy is either lying or a pure genius. It is one of the toughest things to do well consistently without getting your head handed to you and going broke along the way. The recent market action is a terrific example that illustrates the difficulties of shorting.
Even When You Are Right, You’re Wrong
Last Thursday was one of the worst days for the market in six months, which is exactly what many shorts were looking for. Stocks tumbled across the board due to more Middle East unrest and rumblings that the kingpin of the region, Saudi Arabia, could be the next one to experience turmoil. This should be great news for shorts, right? Not necessarily.
Many of the most expensive and shorted names in the market actually went up nicely on Thursday. I am talking about Netflix (NFLX), Chipotle (CMG), F5 Networks, (FFIV), OpenTable (OPEN), and the mother of them all Green Mountain Coffee Roasters (GMCR), which soared over 41%. I have written negatively on several of these, including GMCR, which was obviously premature and highlights the dangers of shorting.
Taking a closer look at Green Mountain, the shares exploded higher on the announcement of an alliance with Starbucks (SBUX). As of February 15, 25% of the public float had been sold short, so many investors believed it was ripe for a tumble. When the price kept going up, these folks were forced to cover their shorts, driving the price ever higher in what was a classic short squeeze. The dreaded short squeeze is the longs best friend and the shorts’ worst nightmare and was on full display in GMCR. It is unlikely the stock would have gone up so much on the news had there been fewer shorts in the name.
So there you have it. On the worst day for the markets in over half a year, the names that should have gotten destroyed actually rallied strongly, creating a double-whammy for those who buy cheap stocks and short expensive ones. Such is the life for those who choose to short, but they know the nature of the game going into it. For those that didn’t know, they surely do now.
Why Shorting Is So Tough is an article from: 
