About the scariest, most dangerous thing you can do is short stocks. So please don’t take what follows as a recommendation that you do so.

But it’s hard to watch Iomega or Presstek or quite a few others bound up six points a day without at least thinking about it. Iomega’s low last year was 1-1/16 and it’s low this year was 11-3/8, and when Barron’s or somebody suggested it was wildly overpriced a week or two ago it was 43 and a few days later when I inquired about shorting it, it was 59 and the next day it was 66.

That’s not a bad run, from 1 to 66. With about 60 million shares outstanding, it means the company is selling for nearly $4 billion, all told. Some careful analysts, looking at the sales and earnings prospects for this company, doubt it is worth that much.

However . . . “nothing goes up forever” — though technically true — are famous last words to any number of bankrupt short-sellers. Still, at 66, surely Iomega is in the “blow-off” stage of this craziness, no?

I have no idea, but it certainly seems that way. Likewise Presstek, which Barron’s has been knocking for years. Someday, all printers may use the Presstek process (just as all computers may use Iomega disk drives). But in the meantime, Presstek earns just a few cents a share, yet sells at 114, up from a 1995 low of 21. Or wait: 114 was last month. Monday it was 149.

Usually, these things turn out to be manias or short squeezes (meaning that the short-sellers are forced or panicked into buying back the shares they shorted, which drives the price even higher, panicking or forcing still more shorts to cover their positions) . . . and eventually the stock drops back to earth.

But there are two problems in trying to buck the crowd and profit from the madness by shorting Iomega at 66 or Presstek at 149. The first problem is that the stocks may go to 350 before falling back to earth, if they ever do. It’s very hard to spot the top. The second problem is that you can’t short them now, at these prices, even if you wanted to.

Try it. (Well, don’t you try it, but I tried it.) At 50 I’m sure you could short all the Presstek you wanted. At 100, you still could short it (and would by now have lost $4,900 on paper for every 100 shares you sold short). But try to short it here at 149, when it’s really really overpriced (maybe — what do I know about printing?), and your broker will tell you, Sorry. I can’t borrow it.

[In order to short a stock, your broker has to be able to borrow the shares from someone who’s long (who owns it) and then sell those shares for you, with you hoping to buy them back at a lower price and “return” them.]

There are already so many people short these stocks (and in agony), you can’t short them.

You could buy puts instead, which is usually smarter anyway (well, less dumb). Buying puts limits your risk to whatever you pay for the put. You will generally lose the money you bet, but no more. Imagine, by contrast, having shorted 1000 Presstek at 30. No cash would have been required, if your brokerage account balances were of sufficient size — no money down! — but you would right now be sitting with a $119,000 loss. Whereas if you had bought 10 puts way back when Presstek was 30 last year, it might have cost you just $5,000, say (depending on the strike price and term of the put) to “control” those same 1,000 shares and profit from their fall. Better to lose $5,000 than $119,000.

But puts on stocks like Presstek and Iomega aren’t cheap. And they expire. If you’re really sure a stock is going to fall sooner or later (does the word hubris come to mind?) but you’re not sure when, you will make more money going short.

I could go into a lot more detail on this, but the whole point of this comment, which I haven’t yet reached, was to explain how to “create” a short sale even when your broker tells you that you can’t, because he can’t borrow the shares.

Let me say again: I’m not recommending this! Most people who short stocks lose money; all lose sleep. It is very dangerous. No kidding.

But if you can’t short a stock because it’s so high everyone else has shorted it and there are no more shares to borrow (possibly a good time to BUY it, though grossly overpriced, with the thought that a lot of those short-sellers will eventually have to be come buyers, pushing the stock even higher in a final panic), here’s how to create a synthetic short:

You simply buy a put and sell a call, both with the same expiration date and strike price.

Take Presstek. When it was 140 (hours before it was 149, but how could you know?), you could have bought an October 150 put for $29 and sold an October 150 call for about $11. (Each option covers 100 shares, so the actual cost of the put would have been $2900, plus commission, and you would have received $1100, less commission, for selling the call.)

The net result of that would be roughly the same as if you had simply shorted 100 shares.

Look at the outcome at both extremes. First, assume Presstek dropped to zero by October. Shorting 100 shares of the stock at 140, you would have made about $14,000. Likewise, more or less, with this “synthetic short.” The October 150 put would have allowed you to sell 100 shares of Presstek to some pathetic, writhing put-seller for $15,000 — shares that cost you zero because Presstek was now zero. So you’d have a $15,000 profit . . . less the $2900 you paid for the put . . . plus the $1100 you would be allowed to keep for selling the call (no one is going to exercise a call that allows them to buy a stock for 150 when it’s worth zero). Net net: $13,200. That’s about the same as shorting 100 shares of the stock at 140 and seeing it fall to zero. (The $800 difference, roughly, is in the spreads between the bid and asked prices of the options.)

Now take the opposite extreme. Say that instead of dropping to zero by October, Presstek hit 500. If you had shorted 100 shares at 140, you’d be $36,000 in the hole. If you had created this “synthetic short,” buying a put and selling a call, you would also be about $36,000 in the hole (plus a bit more for the spreads). You would have lost the full $2900 on the put you bought, which would have expired worthless (there’s no value in the “right” to sell Presstek at 150 when it’s 500) . . . you would keep the $1100 you got for selling the call . . . but whoever bought that call from you would exercise it, forcing you to pay $50,000 to buy and deliver 100 shares of the stock to him in return for his measly $15,000.

Risky, risky, risky.

But kind of interesting, no?


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