Mad Money

Cramer warns: Don't be crude, short sellers, be shrewd

The long and short of it

All you short sellers out there who thought you would get ahead of the oil game, Jim Cramer sends a warning. Be careful with your short selling, and don't overstay your welcome in the house of oil.

This year has brought endless negativity regarding oil. It really has taken a beating. The crash that was going to happen when the Fed ended bond buying, the Ebola scare and the worldwide slowdown are a few examples.

Those who owned the or obvious capitalization stocks like Apple or Microsoft have made out like a bandit in this market.

Hedge funds, on the other hand, did not. They have performed poorly in 2014, mostly because of their need to stay short and bet against the inevitable decline of oil.

"As a former hedge fund manager, I can attest to the need to make money on all down days," said the "Mad Money" host.

A Halliburton worker walks through an Anadarko Petroleum Corporation hydraulic fracturing site north of Dacono, Colo., Aug. 12, 2014.
Jamie Schwaberow | Bloomberg | Getty Images

When Cramer shorted companies in his hedge fund days, he looked for shady hype artists and companies that had terrible fundamentals. He never went against the popular high-flying stocks, unless he thought analyst expectations were unrealistic.

Thursday was a great example as a warning to be careful when taking a short position, as oil came back to bite the hedge funds.

"Case in point? Yesterday I would have come in heavily short in oils, particularly the drillers, because the numbers are way too high if this decline in crude continues," said Cramer.

The constant decline in oil this week sent a wave of selling for all companies that had anything to do with contract drilling or oil services. If it smelled like oil, people sold it. This caused very aggressive short-selling to occur.

That was, until 3:33 pm on Thursday. Halliburton announced that it was in advanced talks to buy Baker Hughes at a premium to the $48 price where it was trading at the time.

Suddenly, investors panicked with the thought that oil companies will start to merge fast and furiously.

Helmerich & Payne which had been trading at $77, started trading at $81. OIH, the oil service ETF, went to $45 from $42. And that's when all hell broke loose, and short covering began.

Read more from Mad Money with Jim Cramer
Cramer Remix: These dissed stocks are ready to run
Cramer: Only the NFL can explain the market
Cramer: JC Penney vs. Macy's throwdown

Suddenly if you were not covering your short position in oil, you were left in the dust. As a result oil prices rose and those who didn't get in on the action got burned.

Cramer's lesson learned in short-selling: Don't overstay your welcome.

"Even the best of short ideas can kill you in this market if you overstay your welcome."

The pattern of 2014 so far, is that everything that can go wrong will go wrong when you short a position. Cramer warns investors to be careful putting your hands in the short-selling pot, before you get burned. Just like the hedge funds did.

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the "Mad Money" website?