Going Short in the Quiet Months

I hope some of you made some money on the usual Santa rally..

As detailed here in my last column it all worked out nicely.

The rally started a day or two later than usual but there were quite a few points for the taking and I got £8,000 ish out of it, then stopped out of it as it started to slip.

And as I pointed out last time the last trading days of the year were again the strongest and there was money to be made.

If you missed out, well there is always next year!

In  the meantime January and February can be pretty poor months. So conversely there could be some money to be made going short.

When I'm in a room with traders I ask if anyone ever goes short. Only one or two hands ever go up. That's crazy, because what happens if there is a bear market for a year and all your shares go down?

At least with shorting you can still make money,

 There are various ways of shorting: CFDs, covered warrants and spread betting. But the easiest method is to spread bet. That would certainly be the method I would use. And it is tax free!

Markets often turn down for quite a while and shorting could be the only way to make money. I tend to only take out short positions in quite large companies.

The reason is mainly the spread. The spread firms usually quote much wider spreads in smaller companies, and for shorting purposes I find the spread is simply too much. So in general I'd only short the top 350 companies.

During crisis years I have held more shorts than longs (buys) because it made sense. I believe at some point in the future I will do the same again.

Many investors use shorting as what’s called a hedge.  For example, you may hold 5,000 shares in a company, but are worried for a short-term period (perhaps the company is about to announce results). You could sell the shares, and buy them back after the cloud has passed, but that could be very expensive (what with broker’s commission and stamp duty).

An alternative is to hold the shares, but take out a down spread bet in the company to an equivalent value of your holding. If bad things do happen, and the share price falls, the amount you lose on your shareholding will be approximately offset by the gains in your spread bet trade.

When I go short generally these days it would be the FTSE or Dow Jones. It's so easy. Just go to the spread bet firm and press sell. A pound a point sell and you make a quid for every point the index goes down and vice versa.

For example in early Jan this year you could have shorted the Dow at around 18,000 and come out of it at around 17,500 making a nice 500 points. For a tenner a point that would be a nice £5,000 profit!

The main thing is to protect yourself in the event of your bet going badly wrong. So use stops with shorts too.

For example if you shorted the Dow at 18,000 for a tenner you may have put a stop at 18,100 so the most you could lose would be £1,000. Or 18,050 so the most loss would be £500. As your bet goes into profit you can move the stop down with it.

So if you shorted at 18,000 you could maybe move the stop 100 points behind the price, the Dow gets to 17,500 your stop is now 17,600. The Dow rises sharply hits your 17,600 but locks in 4k profit.

So to summarise with indices betting. Make sure you get out sharpish if the bet goes wrong. Move your stop as it goes with you but keep it well away from the current price.

Obviously beware with this. It is gambling rather than investing and could bring out the gambler in you!

But say the FTSE hits 6,900 again where it always tumbles. I would be hard pushed to resist putting on a short around there. Stick a stop of 6,970 on it in case!