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I don't like satellite radio as a business and I want to short Sirius (SIRI).

The stock sells for less than $5, so my broker won't let me short it.

Is this a limitation of my broker? Or some SEC rule?

Are there funds that bundle up shares of companies like SIRI that I could short instead? Or are options the best way here?

  • 3
    why didn't you ask the broker? it could be a number of things, like they might not have shares available for you to borrow. – Stan R. Dec 6 '10 at 21:29
  • I did eventually learn how to do this. Google "short combo" in options trading. – John Shedletsky Jan 26 '15 at 20:54
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I think George's answer explains fairly well why the brokerages don't allow this - it's not an exchange rule, it's just that the brokerage has to have the shares to lend, and normally those shares come from people's margin, which is impossible on a non-marginable stock.

To address the question of what the alternatives are, on popular stocks like SIRI, a deep In-The-Money put is a fairly accurate emulation of an actual short interest. If you look at the options on SIRI you will see that a $3 (or higher) put has a delta of -$1, which is the same delta as an actual short share.

You also don't have to worry about problems like margin calls when buying options. The only thing you have to worry about is the expiration date, which isn't generally a major issue if you're buying in-the-money options... unless you're very wrong about the direction of the stock, in which case you could lose everything, but that's always a risk with penny stocks no matter how you trade them.

At least with a put option, the maximum amount you can lose is whatever you spent on the contract. With a short sale, a bull rush on the stock could potentially wipe out your entire margin. That's why, when betting on downward motion in a microcap or penny stock, I actually prefer to use options. Just be aware that option contracts can generally only move in increments of $0.05, and that your brokerage will probably impose a bid-ask spread of up to $0.10, so the share price has to move down at least 10 cents (or 10% on a roughly $1 stock like SIRI) for you to just break even; definitely don't attempt to use this as a day-trading tool and go for longer expirations if you can.

8

A bit of poking around brought me to this thread on the Motley Fool, asking the same basic question:

I think the problem is the stock price. For a stock to be sold short, it has to be marginable which means it has to trade over $ 5.00. The broker, therefore, can't borrow the stock for you to sell short because it isn't held in their clients' margin accounts. My guess is that Etrade, along with other brokers, simply exclude these stocks for short selling.

Ivestopedia has an explanation of non-marginable securities.

Specific to stocks under $5:

Other securities, such as stocks with share prices under $5 or with extremely high betas, may be excluded at the discretion of the broker itself.

  • So the BROKER, not the EXCHANGE enforces this limit? – John Shedletsky Dec 6 '10 at 22:42
  • Also, please see my related follow-up question - money.stackexchange.com/questions/4936/… – John Shedletsky Dec 6 '10 at 22:46
  • I still wonder WHY? – Vitalik Dec 6 '10 at 23:35
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    @Vitalik: Because that's where short shares come from. In order for the brokerage to lend you shares, they have to have those shares, which means they need to be in somebody's margin account - since it's on margin, the brokerage can lend those shares freely. Thus most brokerages won't allow you to short non-marginable stocks, and some may also refuse shorting on highly-volatile stocks with high turnover, because they don't stay in margin accounts long enough. – Aaronaught Dec 7 '10 at 3:39
2

Timothy Sykes specializes in this type of trade, according to his website. He has some recommendations for brokers that allow shorting low-priced stocks:

  • Thinkorswim
  • Sogotrade
  • Interactive Brokers (my personal favorite)
0

If this is the initial transaction, the rules of a short margin account say that if you shorted 1000 share of ABC at $5/share your credit balance would be $5000 from the short plus you would have to put up yourself $5000 cash or $10,000 of marginal securities. So this is not really leveraging using margin. You have to put in just as much as the short generates. Is that what this relates to?

Once the initial purchase has been made the minimum maintenance for a stock trading under $5 per share is 100% of the short market value in the margin account or $2.50 per share whichever is greater.

For stock trading at $5/share or greater the minimum maintenance requirement is $5/share or 30% of the short market value, whichever is greater. The minimum maintenance requirements can be tighter.

  • These are the FINRA requirements. Individual brokers can have tighter minimums. Securities trading on the NTSE and NASDAQ are marginal. Securities trading on the over the counter through the OTCBB and pink sheets are not. Mutual funds and IPO's are marginable if you have held them for more than 30days. – cdc Jul 24 '16 at 21:52

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