UFO

Everyone is still missing the bottom line here. EVERYTHING...repeat...EVERYTHING begins and ends with the cash equity market. Longs and shorts. When you buy an inverse fund like Rydex, somewhere down the line a short is ultimately placed in the actual shares involved in the basket you're shorting. Inverse funds use futures and options to effect their 200% or whatever target. Just because the actual investor might be able to avoid selling his cash position by buying the inverse fund, the net effect on the actual cash market is the same. The market makers will have to sell the basket of stocks short to hedge their futures position which was part of the Rydex trade. All roads lead to the cash market.

U.F.O.

Everything eventually ends in the cash market, this is about the only issue that's correct about your assessment, but this is exactly what makes the big difference.

When a stock is sold short and legitimately borrowed from the market, so not exactly sold naked short, the supply of stocks diminishes, making any positive development very explosive to the upside since the stocks have to be immediately bought back. IF the stocks are not allowed to be sold short, the supply increases in the market place because they are not actually borrowed out of the market place.

So, there is a huge difference when a sophisticated and legitimate hedger who recognizes where the value is and places his bet --instead of liquidating his long term assets-- and when he removes it versus being forced to constantly dumping all of the stocks and buying them back with all of the tax consequences.

IMHO, the market remains vibrant or liquid because of the both long and short trading, only long trading will simply cause crashes and slower recoveries. Please enlighten me, if I am ignorant about this topic...

UFO's logic is flawless, and I saw nothing in the above post that refuted anything he said- though the headline said his logic is flawed. Somehow I think I am missing the point of this string. I think we ALL agree that short selling is an absolutely vital ingredient to the efficient functioning of a healthy free market, and a healthy free market is an absolutely vital ingrediant to the functioning of a healthy free economy, and to the individual financial well being of every one of us. So what is the point here? TIA, D

Edited by IYB, 18 September 2008 - 11:32 PM.

Just because the actual investor might be able to avoid selling his cash position by buying the inverse fund, the net effect on the actual cash market is the same.

I thought for a moment that he implied by this sentence that selling short via futures or inverse funds vs selling the actual shares would produce the same effect on the cash market, so I thought he didn't consider what it does to the supply. Perhaps he never really implied what I wrote above, I guess I was fast reading... Anyhow I guess my bad.

PS. This is what happens when you try to read the entire board in less than 15 mins at the end of the busy day.

Edited by arbman, 18 September 2008 - 11:46 PM.

Just because the actual investor might be able to avoid selling his cash position by buying the inverse fund, the net effect on the actual cash market is the same.

I thought for a moment that he implied by this sentence that selling short via futures or inverse funds vs selling the actual shares would produce the same effect on the cash market, so I thought he didn't consider what it does to the supply.

As I see it, he is exactly correct, because:

1. The change in supply in a very minor factor in the equation anyway, and because, more importantly:

2. Ultimately, as UFO carefully points out, action in the derivative market will work it's way to the cash market just as if one had executed in the cash market to begin with. For example, if I sell short 100 calls, then someone down the line will sell 10000 shares-- the same as if I'd sold short the 10000 shares instead of the calls to begin with. Same is true if I buy ETF's, sell fut's etc. All roads, as UFO says, lead to the cash market.

Anyhow- I know what you mean about trying to assimilate everything here in a short period! Can't be done....Good Trading, Don

"Ultimately, as UFO carefully points out, action in the derivative market will work it's way to the cash market just as if one had executed in the cash market to begin with. For example, if I sell short 100 calls, then someone down the line will sell 10000 shares-- the same as if I'd sold short the 10000 shares instead of the calls to begin with. Same is true if I buy ETF's, sell fut's etc. All roads, as UFO says, lead to the cash market." IYB, I was monitoring SYMC for the past few days and I suspect what you say here is likely the reason it broke support. Surprised I was, to be sure. When a stock is that close to a major pivot anything can happen and quick. Your insight is apppreciated. BW