Michael Shulman

Making a Short Trade

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* Timing: Timing in life is almost everything (where would I be if I had not been invited to the party where I met my wife?), and the same is true for managing short positions. You should set time horizons for how long it will take a position to pan out and, if it does not, it is time to take some losses and move on.

Unlike long positions, where investors can wait out a slowdown in a stock's appreciation or a dip in share value, short positions are expensive to maintain and puts are contracts that can expire worthless -- the clock is always ticking.

Most good short positions take no more than three months to move in your favor; longer-term shorts, which should always be managed through LEAPS, can run much longer but are less typical than the six- to 12-week position.

How to Cover: Believe it or not, you can end up owning a stock and shorting it if you are not careful with your instructions to your broker. When you call or go online to cover a short position, you must specify that this purchase is to cover the open short position. If you do not, you could end up buying the shares and have them sit in your account and also have an open short position at the same time.

Because short-sellers might find themselves exiting their positions in a hurry, it's important to take the time to ensure that you issue clear instructions to your broker so that you get out when you want to!

Let's wrap up: The real issue, of course, is picking the right company that's going south. But you need to mindful of all of the things I discussed today, and that requires some planning, some preparation, some discipline and some clarity of thought.

You used that on the long side; now, use it make short-side profits, as well.