My thoughts on the erosion of information asymmetry is that is a good thing because it makes people more productive. I believe that productivity increases are what fuels the American economy. The Internet and the decrease in information asymmetry can sort of be correlated to general advances in technology (for example, agriculture and manufacturing used to be over 90% of the jobs). The only difference is that advances in technology will always occur, while the decrease in information asymmetry will approach a limit because humans only have so much brain capacity, and there is only so much time in a day. American’s today already work in excess of 40 hours per week and have many other responsibilities…it is just not plausible for people to do everything mainly because of opportunity cost. Lawn maintenance and other things end up being outsourced.

The short I have in should work in either case. With JLN I was mostly long with the short being more of an experiment. Unfortunately, most of these stocks are not optionable or I would simply buy a call to offset my short risk. The obvious risk with shorts is that they literally can keep going up and you have to buy it back at some point. With the payout figure I have an upper cap, so the volatility really doesn’t scare me.

To get into a long and short position for this one really does not make much sense. I would simply be offsetting my expected gains. Both payout cases should work. If they kill the deal, it’s pretty obvious. If they fund it, I will have to wait for a few more days until the reorg is complete and then watch as the stock drops. I don’t want to be a position where I would be long the stock and they not fund, that is the one losing position guaranteed.

Your margin account should not have any additional fees to it. If it does, you should shop for another broker. Again, simply having the margin account does not mean you will be trading with borrowed money. You can continue to trade like you would a cash type of an account. The difference is that your marginable stocks (and not all of them are) will be held in the margin side of the account allowing you to build SMA credit for anything long term you had in mind.

What are your thoughts? Sounds like you are feeling confident in your short and not anticipating the cash-out (if you were, the long/short would make a lot of sense to me). I’m asking more for myself as this would be my first time shorting a stock and I’d like to take a conservative approach.

I plan to sit down at my local Scottrade branch this week and make sure I have a good understanding of how their margin accounts work (fees, penalties, rules, etc.). I’m apprehensive about trading with borrowed money, but I think that as long as I take a rational approach to each investment and don’t get in over my head it may be a good thing.

I appreciate your wisdom and experience. It is nice to have you frequenting this blog.

In any case, Ryan, I don’t hold shorts too long. I just don’t like them. I do expect the stock to get down somewhere below $11/share, at that point I will probably look to cover. The meeting is around June 10th and expect to see some added volatility (can’t imagine why:) I think my position will be in trouble if there is a concerted move above $16.50 for a couple of days. But my reason for the short was two fold:
First, the company bites the bullet and pays out. Virtually every company this has chosen to reclassify has sunk very quickly after the reclassification. I think most shareholders who would be long term investors would want to move into something else. Second, the board kills the deal, which is what I expect. Why would a company want to pay such a high premium for the stock and take such a large interest expense for a sector that is getting hammered. If I was the board I would be looking for any reason to kill the deal. The company probably would still want to delist from the pinks, but you will probably get a better price if you were to wait.

In either case, I think I will come out ahead.

Now go out and open your margin account. There are a lot of reasons to add the margin feature and only one of them is for shorting stock. The reason I use it is for the SMA feature of margin. Essentially SMA tracks your good stock performance by adding in a bookeeping feature that allows you to buy large amounts of stock without coming up with all the money right away. You get to use the credit that you have accumulated without needing the money upfront. There is risk because of margin call for a bad stock position, but overall is more advantageous to have it than not.

Chad has me thinking about shorting the stock. It would be my first short…so I want to take my time and look into it further.