To The Moon

What Is Short Selling and How Does It Work?

Short selling is a trading strategy where an investor borrows and sells a stock, betting its price will fall, then buys it back at a lower price to return the shares and pocket the difference. It’s a way to profit from declining stock prices, unlike traditional “long” investing (buy low, sell high). For a stock like Palantir Technologies (PLTR) at $93.78 (April 17, 2025), short selling could target a drop to $80–$85, driven by its high P/E (~495) or tariff fears (April 2025). However, it’s risky—losses can be unlimited if the price rises. Here’s how it works, using PLTR as context, and its implications for our $10,000 mock portfolio.

What Is Short Selling?

Short selling involves selling a stock you don’t own, expecting to buy it back cheaper later. The process bets on price declines, often used by traders skeptical of stocks like PLTR, with its volatile 350% 2024 run and 40% drop from $125.41 (Feb 2025).

Core Idea: Borrow shares, sell them at today’s price (e.g., $93.78), buy them back at a lower price (e.g., $85), return the shares, and keep the profit.

Risk: If the price rises (e.g., PLTR to $100), you lose money buying back at a higher price.

How Short Selling Works: Step-by-Step

Here’s the mechanics, illustrated with PLTR at $93.78:

Borrow Shares:

You contact your broker to borrow PLTR shares from another investor (e.g., 100 shares).

Brokers facilitate this through margin accounts, charging a borrowing fee (e.g., 1–5% annually).

Sell the Borrowed Shares:

You sell the 100 shares at $93.78, receiving $9,378 (minus commissions, ~$5–$10).

This cash sits in your account, but you owe 100 shares to the lender.

Wait for Price to Drop:

You predict PLTR falls to $85 (e.g., due to tariff impacts or EPS miss in Q1 2025, ~May).

Monitor technicals: PLTR’s $90 support breaking (April 2025) or triple top at $97.25 (X posts) signals a drop.

Buy Back Shares (Cover):

Buy 100 shares at $85, costing $8,500.

Return the 100 shares to the lender, closing the short.

Calculate Profit or Loss:

Profit: Sold at $9,378, bought at $8,500 = $878 (minus fees/commissions, ~$50–$100).

Loss: If PLTR rises to $100, buyback costs $10,000. Loss = $9,378 − $10,000 = -$622 (plus fees).

Pay Fees and Interest:

Borrowing Fee: E.g., 3% annually on $9,378 (~$23/month).

Margin Interest: If you use borrowed money, brokers charge interest (e.g., 8–10% annually).

Example: A 1-month short might cost $30–$50 in fees, reducing profit to ~$800.

Example: Shorting PLTR ($93.78)

Scenario: You short 100 PLTR shares, expecting a drop to $85 (tariff fears, rate hikes to 5–6%).

Steps:

Borrow and sell 100 shares at $93.78 = $9,378.

PLTR falls to $85 (e.g., EPS miss, $0.13 vs. $0.14 expected).

Buy back 100 shares at $85 = $8,500.

Profit: $9,378 − $8,500 = $878.

Minus fees (~$50) = $828 net profit.

Risk: PLTR rises to $100 (NATO deal expands). Buyback at $10,000 = -$622 loss (plus $50 fees = -$672 total loss).

Why Short Sell?

Profit from Declines: Bet against overvalued stocks like PLTR (P/E ~495, vs. tech norm ~50–100) or fading trends (e.g., AI hype post-2024).

Hedge Portfolios: Short PLTR to offset long tech positions (e.g., SPY in our $10,000 portfolio).

Speculate on Events: Short PLTR before Q1 2025 earnings (~May) if tariff fears (34% China, 20% EU) or rate hikes (5–6%) loom.

Risks of Short Selling

Short selling is high-risk, especially for volatile stocks like PLTR (beta 2.15, 37 moves >5% in 2024):

Unlimited Losses: If PLTR surges to $150 (e.g., major AI contract), losses grow infinitely ($150 − $93.78 = $5,622 per 100 shares).

Short Squeeze: Heavy short interest (PLTR’s ~4–5% of float, estimated) can trigger a rally if shorts cover en masse, spiking price (e.g., PLTR’s $71.93 to $93.78, April 4–17).

Margin Calls: Brokers require collateral (margin). If PLTR rises (e.g., $100), you must deposit more cash or face forced buybacks.

Borrowing Costs: High-demand shorts (like PLTR) have steep fees (5–10% annually).

Timing Risk: PLTR may drop to $85 eventually, but a delay (e.g., $97.25 triple top holds) racks up fees.

PLTR ($93.78) and Short Selling

Why Short PLTR?:

Overvaluation: P/E ~495 (vs. Snowflake ~200) suggests $93.78 is inflated unless EPS jumps ($0.1886 to $0.40 by 2026).

Tariff Risks: April 2025’s scare (Dow -2,200) hit PLTR 13% ($71.93). Renewed tariffs could cut commercial growth (36%), targeting $80–$85.

Technicals: Triple top at $97.25 (X posts) and resistance at $95–$97. Break below $90 support signals $84–$87.

Rate Hikes: 4–5% rates (2025) pressure high P/E stocks. A hike to 5–6% (FOMC ~May 7) could compress P/E to ~300, dropping PLTR to $80.

Why Avoid Shorting?:

NATO Deal: April 2025 contract and 17–18% DoD revenue drive $100–$105 potential.

Momentum: 5.7% Nasdaq gain (week ending April 17) and $1.25B FCF support $93.78.

Short Squeeze: Retail buzz (X posts) and 4–5% short interest risk a spike if shorts cover.

Short Strategy: Short at $96 (near resistance) if $95 rejects, stop-loss at $98.50 (above $97.25). Target $85 (11% gain). Avoid if RSI dips below 40 (oversold).

Short Selling in Our Portfolio

Our $10,000 mock portfolio (15% PLTR, 30% SPY, 15% KO, 15% JNJ, 10% IWM, 10% XLE, 5% cash) is long-only, but shorting could hedge PLTR’s risk:

Hedge Example: Short $500 PLTR (~5 shares at $93.78) to offset long PLTR ($1,500, ~16 shares).

If PLTR drops to $85: Short profit = ($93.78 − $85) × 5 = $44 (minus ~$5 fees). Long loss = ($93.78 − $85) × 16 = -$150. Net: -$106 vs. -$150 without hedge.

If PLTR rises to $100: Short loss = ($93.78 − $100) × 5 = -$61. Long gain = ($100 − $93.78) × 16 = $100. Net: +$39 vs. +$100 without short.

Fit: Shorting PLTR suits high-risk tolerance but isn’t needed—KO/JNJ (15% each) already hedge PLTR’s tariff/rate drops (13% vs. 2%).

Broader Market Impact

Growth Stocks (PLTR, Tesla):

High P/E (~495) and beta (2.15) make PLTR a short target in high-rate cycles (2022’s -33% Nasdaq). April 2025’s 13% drop reflects this.

Value Stocks (KO, JNJ):

Low P/E (~25) and stable cash flows resist rate hikes—poor short targets. KO’s 2% dip (April 2025) limits downside.

Sectors:

Tech: Shortable in rate hikes (PLTR, Snowflake). April 2025’s tariff scare hit tech hardest.

Financials: Avoid shorting—JPM gains in high rates (~5% in 2022).

Staples: Low short potential—KO/JNJ hold firm.

How to Short Sell

Open a Margin Account: Required by brokers (Fidelity, Interactive Brokers).

Check Availability: Ensure PLTR shares are borrowable (high-demand stocks may be scarce).

Place Order: “Sell short” 100 shares at $93.78. Set a stop-loss (e.g., $98.50) to limit losses.

Monitor: Watch FOMC (May 7, 2025), tariffs, and PLTR’s Q1 2025 earnings (~May) for price triggers.

Cover: Buy back at $85 (profit) or higher (loss), return shares.

Why It Matters for PLTR ($93.78)

Short Opportunity: PLTR’s ~495 P/E, tariff risks (April 2025), and $97.25 resistance make it a short candidate if rates rise (5–6%) or EPS misses ($0.13 vs. $0.14). Target $80–$85.

Short Risk: NATO deal, $1.25B FCF, and retail buzz (X posts) could push $100–$105, squeezing shorts (4–5% short interest).

Portfolio Fit: Our $10,000 portfolio (15% PLTR, $1,500) avoids shorting—KO/JNJ/SPY diversify risk without unlimited loss exposure. Shorting PLTR only suits high-risk traders.

Short selling lets you profit from PLTR’s potential decline but risks big losses if its AI/NATO momentum drives $100+. Our long-only portfolio already balances PLTR’s volatility. 

Do you dare to short the market today?