A quirk of the short trade-beware!

Discussion in 'Trading' started by jperl, Jul 31, 2001.

  1. jperl


    Every trader who goes short knows that he is responsible to pay the dividends due if he happens to hold a short position through the dividend date. However here is another quirk of short trading which most traders may not be aware of-
    Consider the following trades I made back in August of 2000:

    8/28/2000 sell 60 DIGX @ 83.875
    8/30/2000 buy 60 DIGX @ 86.75

    This short sale was covered two days later for a loss of 2.875/share. You would think my account would now be flat-right? Well guess again;
    It is now 7/31/2001, ALMOST 1 YEAR LATER! I open my account and low and behold I see the following:

    7/31/2001 -11 WCOM @ 14.25
    7/31/2001 debit $4.30

    Yes that's correct I am short 11 shares WCOM.
    Where did this come from? I didn't short WCOM in any trade.
    It turns out WCOM bought out the company that owns DIGX and gave DIGX shareholders 0.18837 WCOM shares/DIGX share for owners of record on 9/1/2000 to be paid out 1 YEAR LATER.

    Since I was still short DIGX on 9/1/2000(settlement for the long trade wouldn't be till 9/05/2000) I have to cough up 60 x 0.18837=11.3022 shares of WCOM. (0.3022 would be in cash)

    The point of this is short trading is not simply the opposite of long trading. I might have gone on vacation for a month and not known those short shares were sitting there like a ticking time bomb.
    If any of you have had these kinds of quirks happen-let's hear from you- I hate these kinds of surprises.
  2. Babak


    Thanks for sharing that.

    To me that sounds like another reason why going flat before 4pm is a great idea :)

  3. mrbud


    Oh man, that's a new one on me. I imagine the same thing could happen long. Your not that lucky. lol