What are the risks when a short penny stock position is delisted?

[bz1516]

I have a couple of successful shorts, one of which is getting close to losing most of its remaining value.  My question concerns what happens when it gets delisted and goes into the black hole of the pink sheets?

 

I’ve been told there are several risks.  First if it goes into the pink sheets and trades as a penny stock it will still carry a minimum margin requirement of $2.50 per share.  So I would have to pay any borrow fee on the market value and margin interest as if it were $2.50 per share.  This would go on as long as and until DTC removes it entirely.  It may also not be able to be traded with no way to end the costs?

 

I’ve also been told this situation could last for years if the stock goes into litigation and DTC still has not removed it.

 

On the positive side I have also been told that if I don’t cover for a realized gain there would be no tax liability?  Sounds too good to be true, but if true holding until DTC removes the stock from their system may make sense? 

 

Any help with these issues would be greatly appreciated

 

[constructive]

Delisting is usually no problem. You should be able to get out of your position even if it moves to the pink sheets. If it's not DTC eligible (which I believe most OTC stocks are), the trade might cost more but a decent brokerage should still be able to execute it.

 

If the SEC puts a halt on shares that lasts weeks or months, that can be a bigger problem.

 

But generally a high borrow rate or getting shares called in will be a bigger issue than getting out of the trade.

[constructive]

On the other hand if it's barely trading now, and you think trading might dry up even more if it delists, then it would make sense to exit the position now without holding out for the last bit of profit.

[Hielko]

A delisting isn't a big risk I think since you would be able to cover when it trades on the pink sheets. Margin requirements will suck though if it's a low priced stock. The biggest risk is when the shares are cancelled, but your broker doesn't have an offsetting long position for your short. In that case you will have to wait for the DTCC to cancel the shares, and that could take some time (weeks, months or even more). So if the borrow fee is high you could get screwed very hard in this scenario.