Rules for Pick of The Year (PoTY) 2018

[Louetta]

So now what happens with billyjoe's SHLD short?

Let JohnHenry decide. He does the work of running the contest.

Sure hope Billy shorted it in real life.

[riverbabe]

So now what happens with billyjoe's SHLD short?

Originally Posted by billyjoe
SHLD has been delisted by NASDAQ.

--------------billy



So, that was my question for JH on POTY. If it is bankrupt, there are no shares to buy to cover your short. So even your short shares are worthless. Does that mean that instead of a 100% gain on your short shares, you have a complete 100% loss? I mean, does this mean you no longer have any position in SHLD in terms of POTY?

Experts, please weigh in here?

[Louetta]

Originally Posted by billyjoe
SHLD has been delisted by NASDAQ.

--------------billy



So, that was my question for JH on POTY. If it is bankrupt, there are no shares to buy to cover your short. So even your short shares are worthless. Does that mean that instead of a 100% gain on your short shares, you have a complete 100% loss? I mean, does this mean you no longer have any position in SHLD in terms of POTY?

Experts, please weigh in here?

Don't claim to be an expert but in real life my experience has been you will need to call the broker and ask them to execute a transaction to close out the short (no doubt they will charge you a trade fee). This will then free up the money. I think it was Blue Wolf that pointed out one could then compute the real percentage gain as 100*((Value of shares shorted)/(2*trading fee)), which is a huge number for any real life size short.

[BlueWolf]

A short transaction involving a delisted or bankrupt stock will always settle eventually. A delisted company’s stock will not disappear, but will show up on another exchange like the Over-The-Counter Bulletin Board (OTCBB) or, more likely for a bankruptcy, the pink sheets. The problem is that if the underlying company is going through bankruptcy, in the real world you might end up waiting a long time for your broker to close the transaction. This, of course, benefits the broker since a short is done on margin with the broker charging you interest until the transaction settles. One way or another, though, the transaction will eventually settle.

For the sake of the contest, I would just keep it simple and calculate the return as:

(Short Share Price - Price When Delisted)/Short Share Price x 100%

This assumes you don’t factor in brokerage fees and accrued interest.

Alternatively, and more accurately, you could calculate the return as:

(Short Share Price - OTCBB or Pink Sheet Share Price at year end)/Short Share Price x 100%

As long as the company is not liquidated, the stock will show up somewhere. Even in bankruptcy there are still shareholders and they are viewed by the courts as debtors.

If the company actually liquidates by the end of the year, the return should be a flat 100%, the theoretical maximum on a short trade disregarding fees and interest.

I hope that helps.

[billyjoe]

When this contest started I think we all assumed if our long picks went up 100% we'd be credited with a 100% gain and if our shorts went down 100% we'd also have 100% gain. I'll admit SHLD probably wont end the year at 0 , but it may be close. Also, sale of assets shouldn't be factored into the final value in my opinion. This is a simple contest not an IRS audit.

------------------billy

[riverbabe]

A short transaction involving a delisted or bankrupt stock will always settle eventually. A delisted company’s stock will not disappear, but will show up on another exchange like the Over-The-Counter Bulletin Board (OTCBB) or, more likely for a bankruptcy, the pink sheets. The problem is that if the underlying company is going through bankruptcy, in the real world you might end up waiting a long time for your broker to close the transaction. This, of course, benefits the broker since a short is done on margin with the broker charging you interest until the transaction settles. One way or another, though, the transaction will eventually settle.

For the sake of the contest, I would just keep it simple and calculate the return as:

(Short Share Price - Price When Delisted)/Short Share Price x 100%

This assumes you don’t factor in brokerage fees and accrued interest.

Alternatively, and more accurately, you could calculate the return as:

(Short Share Price - OTCBB or Pink Sheet Share Price at year end)/Short Share Price x 100%

As long as the company is not liquidated, the stock will show up somewhere. Even in bankruptcy there are still shareholders and they are viewed by the courts as debtors.

If the company actually liquidates by the end of the year, the return should be a flat 100%, the theoretical maximum on a short trade disregarding fees and interest.

I hope that helps.

THANK YOU BW!!! This is so enlightening!!! I had no idea that the shares would still be available somewhere else. But it now makes perfect sense! Your simple calculation for POTY is completely logical. Very surprising to hear about the massive transaction fees in real life. I learn something new from you every time you post. Am very grateful! A cautionary lesson to be learned for my future trading at least.

[riverbabe]

When this contest started I think we all assumed if our long picks went up 100% we'd be credited with a 100% gain and if our shorts went down 100% we'd also have 100% gain. I'll admit SHLD probably wont end the year at 0 , but it may be close. Also, sale of assets shouldn't be factored into the final value in my opinion. This is a simple contest not an IRS audit.

------------------billy

Billy, I was so worried about your POTY pick. Guess I was overthinking, as I sometimes do. Needed a greater understanding. Now it all makes sense. I am so happy for you! You have waited so-o-o-o long! Yay!!!

[riverbabe]

Don't claim to be an expert but in real life my experience has been you will need to call the broker and ask them to execute a transaction to close out the short (no doubt they will charge you a trade fee). This will then free up the money. I think it was Blue Wolf that pointed out one could then compute the real percentage gain as 100*((Value of shares shorted)/(2*trading fee)), which is a huge number for any real life size short.

Thank you Lou for your insight. Hope I won't meet up with this situation in real life! Kind of scary. (Something like the sudden drop of over 40% on Dendreon over night, while I was sweetly dreaming, not knowing I would wake up to a nightmare.)

[BlueWolf]

Sears is now trading as an Over The Counter (OTC) stock under the symbol SHLDQ. The Q indicates a company in bankruptcy. It closed at $0.19 today.

[Louetta]

Sears is now trading as an Over The Counter (OTC) stock under the symbol SHLDQ. The Q indicates a company in bankruptcy. It closed at $0.19 today.

I wonder if there's a possible tax implication here. Let's say you shorted SHLD within the past year. If you figure well that's done and close the short you have a short term gain. If you wait till it goes long term and then buy back via the SHLDQ listing, assuming it's going to stay down there worth only a few cents, you would have a long term gain and presumably pay less in taxes. Methinks.

[BlueWolf]

I’m not entirely sure about this Louetta as I have never held a short position for more than a year. I do believe, however, that the IRS has some funny rules about the tax liabilities of gains from short sales. I read somewhere that all gains from short sales are treated as short term gains. The IRS doesn’t consider the asset, i.e. the stock, as owned until you actually buy it to cover. Hence, it doesn’t matter how long you have held the short position because the capital gains clock only starts ticking when you buy the shares and then relinquish them to the broker to cover your short position. Let’s say you shorted stock XYZ on January 1, 2018 and then bought to cover on January 2, 2019. From the IRS ‘s viewpoint, you didn’t own anything until you bought XYZ on January 2, 2019, at which point you immediately realized a gain. It’s like your buying a stock at a discounted price and then selling it for a higher price, i.e. the sale didn’t technically happen when you shorted it, it happened when you bought and provided the shares to the broker. It’s therefore always viewed as a one day transaction. You have to own something for it to be considered capital, and in a short sale you don’t actually own anything until you buy the stock to cover. Again, I’m not totally sure about this.

[jiesen]

I wonder if there's a possible tax implication here. Let's say you shorted SHLD within the past year. If you figure well that's done and close the short you have a short term gain. If you wait till it goes long term and then buy back via the SHLDQ listing, assuming it's going to stay down there worth only a few cents, you would have a long term gain and presumably pay less in taxes. Methinks.

Well, I would continue to hold onto the short position of a bankrupt stock as long as possible then, so that you could put off paying the taxes on the gain indefinitely.

[JohnHenry]

So now what happens with billyjoe's SHLD short?

Mmm, not sure, never experienced this before. Maybe easier to remove SHLD from the contest (Just joking). I’m OK with the last trading price before going to OTC or just continue with SHLDQ. Any thoughts? It doesn’t matter to me because SOGO is going to double before the end of the year.

My city is down to one Sears from five a few months ago.

[billyjoe]

John Henry, I'd like to take the Dec. 31 price of SHLDQ if that's possible. Thanks

--------------billy

[JohnHenry]

John Henry, I'd like to take the Dec. 31 price of SHLDQ if that's possible. Thanks

--------------billy

Hi Billyjoe,

If our friends are OK with your suggestion I am OK with it. Let’s hear what everyone have to say. If we do not hear anything we could assume it is OK. Thanks