Question about naked short selling:

[brentspeak]

I understand that "clothed" (or conventional) short selling involves an external party (the short seller) borrowing shares from an unknowing investor (via a brokerage) for the purpose of selling those borrowed shares to another third party (where the short seller will eventually have to buy shares back again to make the original investor from whose shares were borrowed whole again, etc.)

However, "naked" short sellers sell shares that haven't been borrowed. If the shares in question haven't been borrowed, how and from whom are naked short sellers obtaining their shares?

[Ruby the Liberal]

1. They aren't. Thats why its called 'naked'

They are betting that they can obtain shares at a later date cheaper than what they are obligated for.

[Cassandra]

2. I believe...

they borrow or buy the shares after they make the deal, so they have cut their risk.

[just55650]

10. this

[pscot]

3. There are no shares

which is what makes it so dangerous. You're selling a promise to deliver the shares at a given price. If the price goes down the shares won't be called and you get to keep the money, If the price goes up, you have to buy the shares in order to deliver them. That's where the trouble starts.

[brentspeak]

4. But in either case, isn't there a buyer on the other end who is expecting to receive shares

after having paid for them?

[pscot]

6. Puts and calls are derivatives

They represent an agreement to accept or provide something in the future. Most people who trade them have no expectation of actually taking or giving delivery. The settlement usually involves paying out or receiving the difference between the price at the time the deal was struck and the time it expires. If you sell a naked call on a $100 stock, you aren't going to get $100. You may get as little as $1.00. You get your profit or loss on the back end, when the transaction is completed. This is a very dangerous game. Take your money to a casino and play roulette. At least there you understand that your chances of winning are slim.

[econoclast]

8. yes...as i thought ... you are talking about selling options naked

But, I believe the OP was asking about shorting shares naked ... a different thing.

[brentspeak]

9. Right, my question was about naked short selling, but not options

And the more I'm reading about the subject, the more I'm convinced that even clothed short selling contributes to a rigged game and can harm investors who are long on their investments.

[econoclast]

5. Sorry, pscot .... but I believe you are thinking about Options

Naked short selling is as described above by others.

naked short sellers short shares they haven't borrowed yet. the idea is that if the stock drops quickly they can buy the shares back to cover the short and never have to worry about borrowing them at all. If the anticipated drop takes a bit longer than they hoped for .... and it appears that they might have to make delivery .... they can borrow them then.

but the fear is that by not having to borrow the shares ... it might encourage short sellers and precipitate downward swings in the market.

( Note ... nobody likes short sellers. It really isn't very different than BUYING on margin ... ie. buying shares you haven't got the money to pay for. It isn't, for instance, labeled NAKED BUYING. But nobody worries ( much ) that margin buying might precipitate UPWARDS swings in the market. Everybody LIKES things that might precipitate upward swings.)

[damntexdem]

7. Naked short selling sounds like something Weiner might have tried.

;-)