Feedback on this newbie strategy, please

K

kwtrade

Hello,

Please comment on this short sale strategy. First, I should mention that I have never shorted stocks, but this is a good time for me to learn...

I own 100 shares of Home Depot (HD), which has fallen. My long term strategy is to hang on to them for a while, because I like HD.

Forgetting about those shares, if I click my TradeKing button to sell short HD 100 shares, I will borrow 100 shares from someone unknown and short sell immediately, and then assuming it goes down yet again, I will buy 100 shares at the lower price and return them. If I'm wrong and the price goes up, then I'm covered from a huge loss by the shares I already own, because I've already paid for them and can use them to pay back the short sale.

This seems a little simple, so that makes me wonder what the flaw is?

Thanks
Kris
 
Read more books, paper trade more, do what ever it takes to educate yourself before you hop in the market.

What you describe is a boxed position. You have two equally matched stocks pulling in different directions. Nothing will happen. If one goes up, its canceled by the other stock.

As far as quick short selling a stock and buying it back again. The difference between the bid and ask get in the way.

Good luck
 
Kris,

This isn't a bad strategy as your long and short cancel each other out. It is the perfect hedge and ensures you will lose nothing in the short-run. If the stock goes lower like you believe you can cover your short at a lower price and close the hedge.

The downfall....if the stock goes up instead you miss out on the profits you would have made. This is a good strategy for managing risk but the trade off is that you may lose out on a potential profit.

Quote from kwtrade:

Hello,

Please comment on this short sale strategy. First, I should mention that I have never shorted stocks, but this is a good time for me to learn...

I own 100 shares of Home Depot (HD), which has fallen. My long term strategy is to hang on to them for a while, because I like HD.

Forgetting about those shares, if I click my TradeKing button to sell short HD 100 shares, I will borrow 100 shares from someone unknown and short sell immediately, and then assuming it goes down yet again, I will buy 100 shares at the lower price and return them. If I'm wrong and the price goes up, then I'm covered from a huge loss by the shares I already own, because I've already paid for them and can use them to pay back the short sale.

This seems a little simple, so that makes me wonder what the flaw is?

Thanks
Kris
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