Trading 101: How To Short A Stock

Audio Length: 00:23:29

Welcome to Episode #27 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

In this episode, Tracey is joined by Jeremy Mullin, Zacks Stock Strategist and Editor of Zacks Counterstrike, a long and short trading service.

Counterstrike is one of the few Zacks trading services that will short individual stocks, and not just use shorting ETFs.

But this leads to the question: How DO you short a stock?

Tracey admits that she has never shorted an individual stock before so she brought in Jeremy to discuss the various scenarios that he looks for to create the most favorable short selling conditions.

There are 2 main scenarios:

1. 1. When an “event” of some kind happens. Recent examples of this were with Lumber Liquidators (LL - Snapshot Report) when it was the focus of a 60 Minutes segment about its Chinese laminate flooring and Chipotle (CMG -Analyst Report) which had to shut restaurants after a health scare. Both “events” caused the stock to plunge.

1. 2. When there are disappointing fundamentals. This usually happens when a company reports earnings or pre-announces disappointing sales or guidance. Recent examples of this scenario were with LinkedIn (LNKD -Analyst Report) and Michael Kors (KORS - Analyst Report). Both stocks plunged on earnings fears, and rebounded. But is the selling really over or is another shorting situation appearing?

How do traders play both of these scenarios? How do you figure out your risk and reward?

Should you only be shorting the glamour names? What about those stocks that appear to be overvalued?

GoPro (GPRO - Analyst Report) certainly seemed ripe for the short sellers after its shares soared and that turned out to be a big shorting opportunity for the savvy investor.

If you don’t want to short individual stocks, should you stick to the ETFs?

Shorting stocks doesn’t have to be scary. Think of it as just taking the other side of the trade.

Jeremy takes on all of these questions and more in this week’s podcast.