More on Getting Shorty

So why don't we just buy puts on the Linux-related stocks rather than short them if we can't get a borrow? Many people have emailed me that since the piece appeared on our site a few hours ago.

To which I say: You must be kidding me? If you can't borrow the stock, you are setting yourself up for a colossal short squeeze. Sure enough, no sooner had I read these emails -- my email was down most of the day -- than I looked at the price of one that I was going to go against -- VA Linux(LNUX) -- and I was not at all surprised to see the stock up 12 points.

When a stock can't be borrowed, you can't just jump into the puts and transfer the problem on to the broker. (We buy in such size that we would need help facilitating the trade. If I want to buy 500 puts on VA Linux, for example, I would have to ask a firm to position me. That means the broker would have to sell 50,000 shares short of VA Linux to sell me those puts and be hedged. If I can't borrow the stock, he can't borrow the stock.)

If a stock can't be borrowed, I don't like to short it or buy puts on it. The "tightness" -- that's the inability to borrow -- means it is a "crowded" short with lots of people out there already betting against the stock. That's the height of danger for a short-seller because stocks can act irrationally when they are heavily shorted. Some stocks just can't be shorted until they are more "freed up" or easier to borrow. Until then, I am passing.

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