Are the Carvana Shorts in Danger of Being Crushed?
The day after the 4th of July, Carvana (NYSE: CVNA) stock popped like a firecracker, running up 25% on no news. Does this mean its sell-off has hit bottom and the stock will continue to surge higher? Not necessarily. I'm bullish on Carvana, but in the short term, the stock could go anywhere. It could drop another 50%, or it could double.
This is true for many growth stocks, but especially so for Carvana because it's a favorite target of short-sellers -- in other words, investors who are betting on the stock to go down. I think shorting any stock is dangerous, because when that stock goes up, you could suffer steep losses for reasons I'll explain shortly. And shorting a former highflier can be catastrophic. Here's why shorting Carvana is a really bad idea.
The way a short sale is structured, you borrow shares from your brokerage at today's price with the obligation to buy them later, paying what the shares cost at that time. If the stock costs less when you close your short position than it did when you opened it, congratulations -- you made a profit on your short. But if the stock goes up, so does the amount you're obligated to pay later.
Source Fool.com
