By Jeff Brown
“The process of shorting a stock can become very costly and therefore it is prudent to only hold shorts for a minimal amount of time,” says Daniel Lugasi, portfolio manager at VL Capital Management in Orlando, Florida.
Risk versus reward for shorting is “extremely unbalanced,” Lugasi says. “The maximum gain on a short sale is 100 percent if the stock goes to zero. The maximum loss for a short seller is unlimited because there is no limit to how much a stock can increase in value,” he says. “Purchasing put options is a less risky alternative to obtaining short exposure on a stock with the only cost being the contract price.”