Short-kiting is an investment strategy that allows naked short sellers to complete a short sale without ensuring shares can be lent beforehand. It involves moving positions from one broker to another to buy time to borrow the necessary shares. It is best used with stocks that are rising and should only be attempted by experienced investors.
Short-kiting is an investment strategy that makes it possible for naked short sellers to successfully complete a short sale, even if they have not ensured that the shares can be lent beforehand. The actual short kiting process is accomplished by moving position from one rider to another. This gives the naked short seller additional time to successfully borrow the shares needed to complete the process.
Because short kits are so closely associated with shorting, it is important to understand what happens when an investor decides to engage in this type of investment strategy. The naked short selling process involves selling shares short. Unlike short sales in which the seller has verified the availability of the shares for trading activity, a naked short sale involves shares in which the trader has not verified that the shares are actually available. If the investor is unable to acquire the shares in a timely manner, often within three trading days, the status of the sale is known as default.
To deal with a short sale in which the investor realizes that the necessary shares cannot be borrowed, the use of short kits helps to buy some additional time. The investor sets up another short sale through a different brokerage and uses the proceeds to cover the initial short sale. Meanwhile, the investor can borrow the necessary shares to complete the position created with the short kit strategy and the result is favorable for all interested parties.
For many years, short kits could only be used if the securities used for shorting were currently enjoying upward movement in price. This approach effectively eliminated the possibility of investors attempting to kite, making use of stocks that were stagnant or falling in value per unit. While it is now possible to employ this approach in various markets around the world, regardless of the current state of stocks, it is still a better move to take a short kit strategy using stocks that are rising rather than showing little or no growth.
Due to the complexity of setting up a short kit procedure, it is often a good idea to engage in this type of activity only if the investor knows the market well and has good experience in the investment process.
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