One of the problems with a lot of pump and dumps is that there are often not any shares to short when the stock is about to fall. However, there are often shares available to short days before, when the pump is just starting. For example, there were at least 5,000 shares per day of TNGS available to short at Interactive Brokers for many days prior to its big drop day. However, from January 19th (the day before its big drop) to January 21st (the 2nd big drop day) there were no shares available to short at Interactive Brokers. Below is a chart from Interactive brokers showing the share availability to short of TNGS.
So what can a short seller do? The simple answer is to box the shares (this is also referred to as simply boxing). Boxing originated as a tax technique designed to delay the realization of capital gains while eliminating the risk of holding a stock. So for example an investor who was long 1,000 shares of AAPL since 1990 would then go short against the box, selling short an equal number of shares either in the same account (some brokers let you do this) or in another account, if he believed the stock was temporarily overvalued. This eliminated the risk of holding AAPL stock and did not require realizing a huge taxable capital gain. This tax loophole was closed in 1997. Now the only reason to box shares is to lock up short shares.
What I do on many pumps (the ones I know I will want to short sell) is I short shares at Interactive Brokers while going long an equal number of shares at SpeedTrader. Sometimes I will already be long the stock as I do sometimes try to make money by buying pumps (but shorting is much easier). Other times I will scalp to open the boxed position (for example I might scalp short and then buy long in my other account to box, rather than covering). By boxing the shares I accomplish two things: (1) I can now short whenever I want by selling my long shares, even long after no new shares are available to short, and (2) I can get better fills when I do decide to short an OTC stock because Speedtrader has more direct-routing options than does IB.
So how did I implement this for pump TNGS? I shorted 3000 shares at Interactive Brokers at an average price of $2.51 on 1/14 (that I later covered at $2.096 on 1/20 and 1/21). The same day, I bought 3000 shares in my Speedtrader account (I think I actually ended up buying for poor scalps multiple times, which explains why my average buy price is so much higher than my average short, and why Profit.ly has the position size at 4900 shares).
To get net short on 1/19 when TNGS was looking weak and I thought it might drop, I sold my long shares at Speedtrader, and I rebought them when TNGS held up (again, I had partial fills and some scalping so Profit.ly shows more than 3000 shares). On 1/20, soon after the open, TNGS looked weak and actually went red on the day. I shorted then by selling my long shares and I bought them back for a loss. When it went red again just a little bit later I believed it was time for the death drop and I sold my long shares a final time (2500 at $2.83 and 500 at $2.85). To cover, later that day and the next day, I covered my short shares at IB. I covered 2,000 shares on 1/20 at an average price of about $2.16; IB bought in 800 of my remaining shares at 2.05 the next morning, and I covered the last 200 shares into the 2nd down day morning panic at $1.64. Overall I netted $1913.21 from my trades on TNGS. Even considering the total capital I needed to make these trades (6,000 shares * a maximum price of $2.89 = $17,340), my percentage return was nice (11.0%).
There are of course downsides to boxing. It uses up capital (and if you aren’t careful you can generate a margin call in one account even though you are not losing money overall), generally requires multiple brokerage accounts, generates more commissions, and requires more planning than just shorting. That being said, as long as the net result is a profit on a stock that would not have been otherwise shortable when you wanted to short it, the end result makes the hassle worthwhile. The only risk to boxing is forced buy-ins of short positions. This actually happened to a couple traders I know who had boxed shares of TNGS in preparation for its big down day. One of those traders was forced by Interactive Brokers to cover his short shares right at the open on 1/20, just an hour before the stock dropped. However, being forced to cover part of a boxed position will only saddle a trader with the costs of commissions and slippage.
A note on the psychology of boxing: I have seen other traders refer to ‘making money’ on one side of a boxed position while ‘losing money’ on the other side. I do not think of it like that. If I am long the same number of shares I am short, I have no net position and no risk. I consider myself ‘flat’ and think about it as if I had no positions in the stock. I then consider myself to be shorting when I sell my long shares.
2nd Down day intraday 1-minute chart
11 thoughts on “Boxing your shorts: Why I could short TNGS when almost no one else could”
Nice summary. Thanks for posting!
Thanks for the summary on boxing. The forced buy-ins does worry me about that strategy. I’ve never been forced to do anything, how exactly does that work. Do you get an email saying you need to cover in the next xx amount of time or we’ll do it for you? Or does your broker just buy and tell you he bought?
If you are forced to buy -in, that probably means the stock is still raising in price and so you’d just keep your long and make a little profit before selling them as well?
The strategy certainly makes sense, I just don’t know how forced buy-ins work.
Different brokers do it differently, but there is usually little notice. The day before IB bought me in on TNGS, around 2pm I received an email saying that if I didn’t cover by 4pm they may buy me in the next morning, but it wasn’t certain because they could find more shares to borrow in the morning. Then I got a confirmation email the next morning saying that it was certain I would be bought in and my account would be updated with the price. I have had forced buy-ins from IB, TOS, Goldman Sachs, SogoElite, Penson, TDAmeritrade, and Etrade. I think IB (and maybe Goldman) was the only one that gave me any warning whatsoever, but my memory is not perfect.
You had a brokerage account with GS?? I thought they were Big Boys only!
It wasn’t directly with Goldman — it was through an introducing broker that cleared through Goldman. But in 2009 I think they decided they didn’t want to deal with anyone with a small account even if it was through an introducing broker.
Very good example on boxing. Thanks Reaper!
May I ask you a question please? I have searched the net for info. regarding the minimum to open an account with Goldman, but with no success. Would you mind telling me Goldman’s minimum?
If you have to ask, the answer is no. 🙂 I have heard it used to be $10m to open directly with Goldman but now they want $100m. I went through an introducing broker that normally deals with minimum account sizes of $1m. Because I had a connection with a former client of the broker and I trade a lot, I got in with only a $300k account. I will not mention any of the introducing brokers I had, mostly because I was not that impressed with them.
LOL! Very true.
Thanks. I will look into going the introducing broker route.
Note: If you box/unbox to get around the prohibition against shorting at the bid on a listed stock under SSR (short sale restriction), you ARE VIOLATING THE LAW. The SEC has gone after some traders that do that.