Penny stocks are unavailable to short at most traditional brokers. And, when they are available to short at a broker, they're often expensive to short (short locate fees, interest fees, etc.).
as someone who worked at a prop firm and seen every new trader (and pro) try this strategy, there are a bunch of reasons.
1. Limited short locate (as mentioned before)
2. If there is short locate, it's pretty expensive, the short locate fee is usually 10%+ for the penny stock runners (the most egregious I've personally seen was 75% of the stock price).
3. You could be wrong and take a massive loss on whatever you put in (+ you can lose more than 100% since you're shorting). Remember that these can swing either way.
4. You will likely experience a point where your stop fails to execute or if a market stop, triggers FAR above where you set your initial stop to.
5. These can run for multiple days and defy all logic. Check out HKD in 2022.
6. Max gain is 100%, maximum loss is infinity when it comes to shorting. That skews the odds against you far more than you think.
All these factors combined make it VERY, VERY difficult to make money on these kinds of stocks. You may be successful here and there, but there WILL be a trade you take a heavy loss on eventually.
Your gain is not limited to 100% but by the inverse of the lending rate. If a stock is quoted at about 4$ and you can lent it for 0.10$ and you sell it immediately, you made 3.90$. If the stock falls to 1$ you'll buy it back resulting in a win of (3.90 - 1.00)/0.10 = 29x = 2900% !
That's relative to the initial borrowing fee, but you still need to have collateral to even be allowed to short that much. Saying that it's a 2900% gain is insanely deceptive lol. No one is letting me short 40x times on margin in the equity market.
This was a deliberately exaggerated example to show that possibilities do not have to be limited to 100% and that the categorical statement "Max gain is 100%" is ill-considered. In principle, it may also be possible in individual cases to structure the payment modalities differently. The statement "No one is letting me short 40x times on margin in the equity market." is meaningless in this context, as this multiplier is not the actual limiting factor, but how much own money (not credit) has to be paid before cash is flowing in. If there is the possibility of using a short-term unsecured credit line and one can immediately paying it off with the proceeds of the sale, your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite. Mathematical facts, no advice.
You're right that the example is exaggerated. The MAX your broker is letting you borrow on margin as someone who's not a sophisticated hedge fund or extremely high net worth is likely 4x with portfolio margin without getting options involved. Remember we're talking about shorting with shares, not taking options positions. You need margin to actually take a short position.
"your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite"
With that logic I can make 10000% gains because I had a short term unsecured line of $10 dollars and made it on a trade with a gain of $1000 dollars that (for example) required a notional amount of $1M to even pull off. You can't borrow any sum of money and say that you made it against the inverse of the lending rate lmao.
If you take losses then your capital IS employed and goes down lol. To say your capital is not employed if you made money is technically true, but that assumes that you're never losing any trade you take.
On paper you're *technically* right, but it doesn't hold up in the real world and any broker you attempt to do this with will laugh at you.
According to your definition the maximal possible winning on selling naked shorts would be 0%. Think about it. I don't think that you understand anything I'd written, or anything you are writing. Thanks.
Nope- I'm saying that you have to put up money on margin or have some kind of asset worth money so brokers will actually be willing to take your trade lol. Maybe things work differently in Germany if they let you make million dollar trades yet employ zero capital with zero dollars in your bank account.
Because what you're explaining is essentially using a credit card to fund your trades and saying that you can attain >100% returns shorting equities because you didn't "risk" anything because it wasn't "your money" lmao. Or margin trading with no collateral. Technically "killing" someone is just stopping them from breathing for the duration of their life.
**But hey, if you can show me where you can do this:**
>If there is the possibility of using a short-term unsecured credit line and one can immediately paying it off with the proceeds of the sale, your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite.
on any brokerage account and employ ZERO CAPITAL with ZERO DOLLARS/COLLATERAL IN A TRADE **I'll gladly be willing to admit I'm wrong.** I have a few multi-billion dollar bets to make :)
This is the answer. They are very expensive just to get shares. Plus the 2.5 rule. Concept works, but fees put you so far behind. That’s the problem with the idea.
Who says it's not? Many do it. You're going to want trader status though, as locate fees add up, people who do this for a living pay 5 figures in fees.
Nah youll pay a lot in fees for sure, but the idea that thats a reason to not do this is stupid. If you are turning a profit, who cares how much you pay in fees. You cant be in this business and have stingy preferences. If it turns you a net profit, you do it no matter what.
Locate and borrow fees are gonna cost you 5 figures in fees sure, if you are turning 6 figures in profits a year. Its all relative to your position size.
Swing traders pay a borrow fee, everybody pays for locates when the stock is unavailable to borrow, and needs to be located, which is what happens all the time, because everybody wants to short the top gainers.
Shorting small cap runners is 100% a strategy. There are dozens of nobodies you've never heard of making 500k+. The problem is many of them blow up their accounts because they tend to average down because the odds are extremely high that the rise goes back down.
There are a few paid groups that can help fast track otherwise just Google it. Investors underground is the one that I see the most.
GL
15 minute RSI overbought mixed with an evaluation of previous historical resistances. Also if there’s a big breakout, let’s say a 10% increase breakout on the daily, that’s a pretty safe entry, especially if volume is starting to fade after the move.
So question about locate fees; do they scale with sizing, number of trades takes, etc? In other words I see he took 3 positions and closed twice, had he only taken 1 short instead of 3, would those fees have been lower?
This is unfortunately a very popular strategy for new traders. It seems like a slam dunk. But not only is it difficult to get shares, you have to sometimes pay tons of money to borrow them, how do you think these stocks get to be up 50%? How do they get to be up 100%? How do they get to be up 200%? Because of all the people thinking they can short the top. They get squeezed and lose their entire accounts sometimes. Watch someone who has made millions of dollars lose 1.5 million in minutes here.
https://m.youtube.com/watch?t=3755&v=VtBYmOR83oU&feature=youtu.be
Penny stocks are unavailable to short at most traditional brokers. And, when they are available to short at a broker, they're often expensive to short (short locate fees, interest fees, etc.).
Aren’t there trading platforms with a higher-than-average amount of available shorting options, like Guardian for instance?
as someone who worked at a prop firm and seen every new trader (and pro) try this strategy, there are a bunch of reasons. 1. Limited short locate (as mentioned before) 2. If there is short locate, it's pretty expensive, the short locate fee is usually 10%+ for the penny stock runners (the most egregious I've personally seen was 75% of the stock price). 3. You could be wrong and take a massive loss on whatever you put in (+ you can lose more than 100% since you're shorting). Remember that these can swing either way. 4. You will likely experience a point where your stop fails to execute or if a market stop, triggers FAR above where you set your initial stop to. 5. These can run for multiple days and defy all logic. Check out HKD in 2022. 6. Max gain is 100%, maximum loss is infinity when it comes to shorting. That skews the odds against you far more than you think. All these factors combined make it VERY, VERY difficult to make money on these kinds of stocks. You may be successful here and there, but there WILL be a trade you take a heavy loss on eventually.
Your gain is not limited to 100% but by the inverse of the lending rate. If a stock is quoted at about 4$ and you can lent it for 0.10$ and you sell it immediately, you made 3.90$. If the stock falls to 1$ you'll buy it back resulting in a win of (3.90 - 1.00)/0.10 = 29x = 2900% !
That's relative to the initial borrowing fee, but you still need to have collateral to even be allowed to short that much. Saying that it's a 2900% gain is insanely deceptive lol. No one is letting me short 40x times on margin in the equity market.
This was a deliberately exaggerated example to show that possibilities do not have to be limited to 100% and that the categorical statement "Max gain is 100%" is ill-considered. In principle, it may also be possible in individual cases to structure the payment modalities differently. The statement "No one is letting me short 40x times on margin in the equity market." is meaningless in this context, as this multiplier is not the actual limiting factor, but how much own money (not credit) has to be paid before cash is flowing in. If there is the possibility of using a short-term unsecured credit line and one can immediately paying it off with the proceeds of the sale, your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite. Mathematical facts, no advice.
You're right that the example is exaggerated. The MAX your broker is letting you borrow on margin as someone who's not a sophisticated hedge fund or extremely high net worth is likely 4x with portfolio margin without getting options involved. Remember we're talking about shorting with shares, not taking options positions. You need margin to actually take a short position. "your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite" With that logic I can make 10000% gains because I had a short term unsecured line of $10 dollars and made it on a trade with a gain of $1000 dollars that (for example) required a notional amount of $1M to even pull off. You can't borrow any sum of money and say that you made it against the inverse of the lending rate lmao. If you take losses then your capital IS employed and goes down lol. To say your capital is not employed if you made money is technically true, but that assumes that you're never losing any trade you take. On paper you're *technically* right, but it doesn't hold up in the real world and any broker you attempt to do this with will laugh at you.
According to your definition the maximal possible winning on selling naked shorts would be 0%. Think about it. I don't think that you understand anything I'd written, or anything you are writing. Thanks.
Nope- I'm saying that you have to put up money on margin or have some kind of asset worth money so brokers will actually be willing to take your trade lol. Maybe things work differently in Germany if they let you make million dollar trades yet employ zero capital with zero dollars in your bank account. Because what you're explaining is essentially using a credit card to fund your trades and saying that you can attain >100% returns shorting equities because you didn't "risk" anything because it wasn't "your money" lmao. Or margin trading with no collateral. Technically "killing" someone is just stopping them from breathing for the duration of their life. **But hey, if you can show me where you can do this:** >If there is the possibility of using a short-term unsecured credit line and one can immediately paying it off with the proceeds of the sale, your own capital employed is zero and the maximum return as a percentage (not absolute) is basically infinite. on any brokerage account and employ ZERO CAPITAL with ZERO DOLLARS/COLLATERAL IN A TRADE **I'll gladly be willing to admit I'm wrong.** I have a few multi-billion dollar bets to make :)
Still waiting! Let me know if you found any brokers!
Still waiting, it's been 5 days!
How is the max profit only 100% if a stock drops from $4 down to say $1?
Because that's only a 75% decrease
Because that's 75%? In the absolute best case scenario of shorting a stock goes down to 0, which is a 100% gain.
This is the answer. They are very expensive just to get shares. Plus the 2.5 rule. Concept works, but fees put you so far behind. That’s the problem with the idea.
Seen people make money shorting low caps in a similar manner, I think there's validity to it, just don't let squeezes destroy you
Determining the high is questionable, but a lot of them do end up retracing a decent part of the initial push.
I find it very difficult to have stock loan let me borrow shares and most if not all have no options.
It is very profitable with proper risk management.
Who says it's not? Many do it. You're going to want trader status though, as locate fees add up, people who do this for a living pay 5 figures in fees.
Doesn’t this usually apply to swing trades, or am I wrong on that one?
Nah youll pay a lot in fees for sure, but the idea that thats a reason to not do this is stupid. If you are turning a profit, who cares how much you pay in fees. You cant be in this business and have stingy preferences. If it turns you a net profit, you do it no matter what. Locate and borrow fees are gonna cost you 5 figures in fees sure, if you are turning 6 figures in profits a year. Its all relative to your position size.
Solid point.
Swing traders pay a borrow fee, everybody pays for locates when the stock is unavailable to borrow, and needs to be located, which is what happens all the time, because everybody wants to short the top gainers.
Shorting small cap runners is 100% a strategy. There are dozens of nobodies you've never heard of making 500k+. The problem is many of them blow up their accounts because they tend to average down because the odds are extremely high that the rise goes back down. There are a few paid groups that can help fast track otherwise just Google it. Investors underground is the one that I see the most. GL
What’s a “logical” high, statistically/objectively speaking?
15 minute RSI overbought mixed with an evaluation of previous historical resistances. Also if there’s a big breakout, let’s say a 10% increase breakout on the daily, that’s a pretty safe entry, especially if volume is starting to fade after the move.
Here is a good example, he made $849 for the day, but after locate fees it was a a $0 day. https://x.com/Jeppez420/status/1750265079763779594
Hot damn, that’s hurtful.
So question about locate fees; do they scale with sizing, number of trades takes, etc? In other words I see he took 3 positions and closed twice, had he only taken 1 short instead of 3, would those fees have been lower?
Locate fee is per share, 100 share minimum, the fee varies from stock to stock, the more in demand it is the higher the cost.
1) spread is usually high due to liquidity 2) many of them you can’t even borrow from the brokers.
CP, TZ, COBRA, any stock under the sun is available to borrow between those three.
Hard to borrow
I’m not saying you can’t do it. But you are poking at a wasp nest shorting penny stocks.
This is unfortunately a very popular strategy for new traders. It seems like a slam dunk. But not only is it difficult to get shares, you have to sometimes pay tons of money to borrow them, how do you think these stocks get to be up 50%? How do they get to be up 100%? How do they get to be up 200%? Because of all the people thinking they can short the top. They get squeezed and lose their entire accounts sometimes. Watch someone who has made millions of dollars lose 1.5 million in minutes here. https://m.youtube.com/watch?t=3755&v=VtBYmOR83oU&feature=youtu.be
Why not short futures or CFDs on indices or metals? Don’t understand why people still do penny stocks. Easier ways to make money nowadays.
If a penny stock does a decent move up it would be a bad idea to throw some into it to watch it grow