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Grant on Minimizing Risk When Shorting Stocks

“When you short individual securities, what do you use as hedges against quick market moves if the market were to go up in that particular stock?”

Calamos Co-CIO Michael Grant, Head of Long/Short Strategies and Senior Co-Portfolio Manager, happened to be on a call with investment professionals last week during the retail trading frenzy involving GameStop and other affected stocks, and so this question was to be expected.

“The first thing we look at,” Grant answered, “is simply the size of the company, and the degree to which it can be manipulated by many of the social media crowds that are following these stocks. We’re not short anything that is what I would describe as small.”

“The key risk tool is ensuring that you properly size your short. If you do that properly, then ultimately the degree of damage that can occur from being wrong is limited.”

Calamos Co-CIO Michael Grant, Head of Long/Short Strategies and Senior Co-Portfolio Manager

The second point he made relates to sizing. “The key risk tool is ensuring that you properly size your short. If you do that properly, then ultimately the degree of damage that can occur from being wrong is limited,” Grant said.

Finally, he said, “We have very, very strict guidelines around when we can cover shorts. If we're uncertain about volatility in the short term, then we will use option strategies, in some cases to protect those positions.”

“In fact, through December and into January,” Grant added, “we had been using a number of 1x2 call spreads. These are for names that we don't favor, and can see the logic fundamentally for being short. But we're concerned about the very issue that you present.

“The 1x2 call spread enables us to benefit from a short-term upward movement in the stock before we establish a short. Ultimately, it raises our entry point into that short position,” explained Grant.

The bottom line, he concluded, is that “you’ve got to get your fundamentals right, but you also have to be very mindful, technically, of the kind of stock that you're getting involved with.”

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