Short Selling – Strategies, Risks, and Rewards : [PDF Download]

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“There is one possible class of investors for whom the need to post collateral will not be a major problem. These are broker dealers who hold a large inventory of customer’s securities in margin accounts. The standard margin agreements permit these to be lent out (and contain no provision for crediting the owners with any profits earned).

If these are used for making short sales, the broker brings in cash which is available for other purposes. Because such brokers normally are heavily indebted to banks for the money to finance short positions, they in effect earn the broker’s call rate on this money.

Broker-dealers are often those best positioned to convert calls into puts by selling puts, buying calls, and then hedging by selling the stock short. In theory, puts may be priced to reflect their costs of operation and may provide a more attractive way for individuals and others who do not get use of the proceeds from a short sale to act on any negative beliefs they have.

Of course, since puts are usually short-term instruments, the cost of rolling them over in commissions and spreads again makes placing long-term short bets unattractive.”

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