Best To Deliver

  

In trading, to go "short" something is to bet against it. If you short a stock, you think the stock will go down in value. The mechanics of the short involves borrowing the security from someone else, selling it at current prices, then looking to rebuy the security at a later date, hopefully at a lower price. Then, once you've bought the security back, you can return it to the person or company that loaned it to you in the first place.

Stocks aren't the only thing that can get shorted. You can short bonds as well. Bonds, however, come in variety of types. They have different durations and different yields (a 10-year bond at 5% vs. a 15-year bond at 8%, etc.). With all this variety, an investor involved in a short has a lot of choices about what they will buy back in order to close the short.

That's where "best to deliver" comes in. This terminology designates what type of bond is acceptable to deliver in order to close out a short position. It represents an agreement between the parties about what the person running the short will return to the bond owner once the position has run its course.

The term also refers to a Yelp-like ranking of surgeons who are specialists in removing the liver. But that's different.

Related or Semi-related Video

Finance: What are short cover and squeez...7 Views

00:00

finance a la shmoop what is short-covering

00:04

and squeezing the shorts hmm alright ever see anyone walk uncomfortably out

00:10

of the target changing room wearing something the clothing designer never [Man wearing tight clothing by changing room]

00:14

intended to fit onto that body yeah that would be squeezing the shorts in in Wall

00:20

Street speak the term is kind of related a given stock has a float of say a

00:25

hundred million shares and averages trading of three million shares a day

00:29

well there's a big hedge fund that's convinced the company's cancer curing [Woman gulps a pill]

00:33

drug will actually only turn the users toenails bright green and all of this

00:38

will come to light soon the stock will sell off big so they shortened short and

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short recall that short selling is when an investor borrows stock betting that

00:48

the stock will go down in price and then sells it so yeah that's how it works

00:52

they essentially borrow securities from the brokerage with whom they've set up [Stock transfers from brokerage to hedge fund]

00:56

the short selling arrangement those shares get sold at whatever price

01:00

they're trading out at the time that the short sales happen the hedge fund then

01:03

waits until the stock falls to its target price hoping that it actually [Cancer B Gone stock price falls]

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falls and doesn't go the wrong way at which point it then buys back the stock

01:12

more cheaply delivering it back to the brokerage and booking what is you know

01:16

hopefully a hefty profit right so they'd shorted it a hundred and then it falls

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to 80 and they buy it back and make twenty bucks a share but things don't

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always work out according to the best laid plans of hedge funders and men so

01:27

cancer begun stock climbs despite the hedge fund having bet that it would go [Cancer B Gone stock increases]

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down well in horror the hedge fund watches as the stock climbs from 80 to

01:37

82 to 85 to 90 with the fund all the more sure it's worth 10 bucks a share

01:42

after continued shorting of more and more and more shares betting on the [People in meeting looking unhappy]

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downfall of cancer be gone while the hedge fund wakes up in more horror one

01:51

morning to read the cover The Wall Street Journal which says the drug [Man reading newspaper]

01:54

actually works so the CBG shoots suddenly to $200 the

01:59

next moment leaving the hedge fund now with an average short sale price of

02:03

around 85 bucks a share the hedge fund is $115 a share in losses now that's per

02:09

share times the 10 million in shares it shorted and remember it

02:13

only trades 3 million a day on an average day that's three days and change

02:17

of short position on this stock the loss on this short has wiped out all the

02:21

games for the year of the hedge fund and worse the stock now has virtually [Stock price rises]

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unlimited upside as cancer curing you know is a thing

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so the hedge fund is squeezed why squeezed well it's short position is [Man squeezes hedge fund water bomb and it pops]

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squeezed because now it absolutely has to buy back the shares at the $200 plus

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price and it has to buy him back because the odds of this stock Falls or goes

02:45

down with all the positive headlines coming from journalists all around the

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world about cancer being cured well pretty low right stock probably going to

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300 400 who knows but it's going up so the hedge fund will have to capitulate [Man giving speech on stage]

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that it was wrong in shorting in the first place and all of its competitors

03:00

know this fact as they carefully track the short position on the stock noting

03:05

that some 50 percent of the hundred million total shares or 50 million

03:10

shares that were floating were in fact short enormous short position like this

03:14

one hedge fund wasn't the only one betting it would fall so being the

03:18

kindly loving people that hedge funders are the competitors will be buying the [Competitors give money to brokerage]

03:22

snot out of the stock for a while bidding to 20 to 30 to 40 until enough

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volume and shares transacting passes so that the hedge funds will have covered

03:32

their shorts meaning the guys who shorted it at a hundred bucks have to

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pay to twenty to thirty to forty whatever the price is to unwind their

03:39

shorts before the stock goes the 300 400 500 and bankrupts them that's getting

03:45

squeezed that's how short squeezes work and

03:47

punishes hedge funders for ill-timed bets that are wrong and yeah you don't bet [Hedge funders sitting at a table]

03:53

against a curing cancer at least hopefully not in our world the position

03:56

there in those shorts being SQUOZE is uncomfortable like this uncomfortable [Man in tight pants in a changing room]

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