The Best of Kass

Today, Microsoft(MSFT) has announced that it is making a $300 million strategic investment in Barnes & Noble(BKS) , a heavily shorted stock.

In the case of Barnes & Noble, there are 58 million shares outstanding, but the float (noninsider shares owned by the public) is only 18 million shares.

There are 19 million shares short, representing more than 100% of the float!

Another principle I have with regard to shorting is that I never short a stock whose short interest is more than three days of volume.

In the case of Barnes & Noble, the average daily trading volume (over the past three months) is 1.3 million shares. The 19 million shares short represent about 15x (and days) average daily trading volume.

These conditions are nonstarters to me and why I have never shorted Barnes & Noble, which has always had a questionable business model.

This morning, Barnes & Noble's shares have more than doubled in premarket trading.

If you must short a stock with a high short interest relative to the company's float, elect to buy puts and define your risk.

Otherwise, shorting heavily shorted stocks can be harmful to your investment and financial well-being.

I know; I have the investment scars to go with that experience!

At the time of publication, Kass was long Microsoft shares and short Microsoft calls.