Three Strategies Every Short Seller Must Know

2. The Event-Driven Short

Whether on a macro-market level or on an individual company basis, there are distinct events that can provide trading opportunities to the short seller. Event-driven trades rely on a specific isolated occurrence, after which a profit is made or lost, but in either case, there is a clear finality to the trade. Here are a few types of events worth noting:

• Earnings Announcements: In anticipation of an earnings announcement, short sellers will seek to position themselves in favor of an earnings disappointment or guidance reduction (see "Beginner's Guide to Earnings Calls" or "Five Missteps to Avoid in Earning Season").
• Court Cases: There are matters of judicial decisions that can impact a company or several companies. My most successful short (and one from which I gained notoriety) was that on Martha Stewart Living Omnimedia (MSO - Cramer's Take - Stockpickr). My thesis was that not only was Ms. Stewart going to be found guilty and sent to jail but her eponymous publishing and media business would suffer as a result.

  Another example: Research In Motion (RIMM - Cramer's Take - Stockpickr) was engaged in a civil matter over patent rights with NTP, a privately held corporation. Early in the litigation, Research In Motion was an excellent short as it continued to lose court battles. However, once Research In Motion and NTP settled, Research In Motion made an excellent long . I have played Research In Motion both ways -- long and short -- with much success.

• Economic Data Releases: Macro-market shorts are often made in anticipation of an economic data release or data-related event, such as the monthly non-farm payroll survey, FOMC interest rate announcements or GDP data (see "Five Things You Must Know About the Fed").

As you can see, events can be used not only for short sellers but for long-side traders as well. However, the construct for a short based on an event is necessary for any discussion of short selling.