The short seller's shuffle earns a buck backwards

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Short sellers buy high and sell low -- the flipflop of the old Wall Street adage. Let's say Biogamblers Tech is trading at $50 a share, but you think its headed for a fall. To sell BT short, you must borrow 100 shares from your broker. You now have a ``short position.''

A month later, BT reports a big drop in sales. Its stock tumbles to $40 and you decide to pay off your loan or ``cover'' your short position. You now buy 100 shares of BT at $40 and hand them over to your broker. Your profit: $10 per share minus transaction costs.

But suppose BT creates a bug that eats nuclear waste and its stock shoots to $90. Now you're in the hole. If you cover your position, you've lost $40 per share plus transaction costs. If you decide to wait, hoping it will fall, you still must ante up cash or stock for your broker.

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When you borrowed the 100 shares at $50, you had to put up $2,500 in cash or securities -- 50 percent of the loan -- as collateral. The stock exchange requires that upfront money must stay above 30 percent of the market value of BT (or $5 whichever is more). Since your 100 shares of BT stock are now worth $90 each, you must put in another $200 to boost your collateral to $2,700.

Another short sale rule is that you can't take a short position while a stock is falling (over-the-counter stocks are excluded from this rule). You must wait until an ``uptick,'' or a rise of one-eighth of a point.

Short selling is risky. When you buy a stock, go ``long,'' the most you can lose is total price of the stock. But when you short, your losses are theoretically unlimited. Of course, short sellers often use stop-loss orders to limit their losses. -- D. C. S.

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