JL: So I’m guessing you had a busy week.

CASH: How can you tell? I know you can’t see the dark circles under my eyes through the phone. Is my voice twitching?

JL: Haha — no, you sound fine. But the calendar really picked back up. You had to be in there making all kinds of moves.

CASH: You’re starting to sound like a trader now! I like it!

JL: Whaddaya mean “sound” like a trader? I’ve been runnin’ and gunnin’ for as long as you… maybe just not as quick on the draw…

CASH: I know, I’m just playing with ya. Our mutual love of markets is how we became friends in the first place. And yes, there were a bunch of deals this week. It’s definitely kept me busy. We already talked about what a success Intrepid Potash (IPI:NYSE) was right out of the gate, and the stock actually booked an even higher close on Friday. What a great story!

JL: Are you buying more IPI then?

CASH: Not right this moment. I’m still holding half of my position to see where the momentum takes it, but I wouldn’t be a big buyer again just yet. Patience is a virtue…

JL: Indeed. Speaking of patience, what happened with American Waterworks? You weren’t too excited about the short-term prospects on that one. I think you were getting a share allocation when we last talked.

CASH: Ugh. Yeah, I got all I wanted on that deal.

JL: Uh-oh. If you never get enough of the good ones, that’s not great sign.

CASH: You can say that again. When you get all the stock you signed on for and your guy calls you back and says, “Great news! I can get you another 10,000 shares, no problemo!” you know it’s going to be a long day.

JL: So did you, ah, take a bath on American Waterworks then?

CASH: Ouch, bad pun alert. Nah, I’m too slippery for that. I got dinged, but it was small beer compared to my IPI gains. I’m now actually out of American Waterworks completely. But my guys are all thankful that I took shares off their hands… and their managers are excited to see that I’m still long.

JL: Come again? You said you were out of the stock completely, but the managers still think you’re long it?

CASH: Heh. This kind of thing is a big reason why we use a pen name in these conversations.

JL: That and the fact it’s fun to goof around with your name.

CASH: True — can’t underestimate the value of having a little fun. But as far as day-to-day trading goes, I play little games with these underwriters all the time. It’s not uncommon for a “long” position with one investment house to be neutralized by a “short” position elsewhere — without the first party being any the wiser. This isn’t anything exceptional. It’s just a part of doing business when your business involves maintaining relationships on the street. With a stock like American Waterworks (AWK:NYSE), I knew I’d have to protect myself by taking some “covert action.” So I did.

JL: For the benefit of our readers, can you quickly hit the highlights of what made AWK a bad deal? What were the danger signs, or clues, if you will?

CASH: Sure. Since AWK didn’t have enough demand from the get-go, they had to lower the price significantly to get the deal done. That was clue No. 1. Clue No. 2 was when I got all the stock I asked for from at least from different brokers. With that, I knew they were having trouble finding a home for all the shares — certainly not a positive development. Finally, when the actual stock issued, it immediately traded down 50 cents or more. That put me in full damage-control mode.

JL: So what does that look like? Explain how you control the damage without stepping on the toes of the underwriters. Obviously, we know that if you just liquidate your holdings en masse, the underwriters will get their feelings hurt and you won’t be on the list the next time a good deal prices.

CASH: Right. I went to a good discount broker, another of my many contacts, and got a borrow on the stock. In other words, I found someplace else to short it. Sometimes this is difficult and I have to look more than one place before I find stock I can short.

JL: To keep our readers up to speed, let me get this straight. In order to short a stock, a trader first has to get a legal “borrow,” which involves finding someone else’s long shares. The trader then sells this “borrowed” stock on the market, with the understanding that he will eventually re-purchase the shares and return them to the broker. And this is all usually pretty cut and dry established stocks, but can take a bit more time to pull off with a brand-new or thinly traded stock.

CASH: Exactly. So once I got hold of a borrow, I spent the rest of the day shorting the same amount of American Waterworks stock I held long in my underwriter accounts. So now, if AWK trades up big, I’ll be ticked because I’ll lose just as much on my shorts as I make on my longs. That’s the price of neutralizing the downside.

JL: But you don’t see a big uptick for AWK anyway.