Short sale myth?

Discussion in 'Trading' started by garfangle, Mar 5, 2004.

  1. One of the principle tenets against short selling is you can never make more than a 100% return, but on the long side the upside is unlimited. However, it seems that if you are convinced a stock will go to zero or very close to it, then you indeed can make more than a 100% return.

    Traditional thinking:

    stock A long: 25 to 50 = 100% upside; profit +25
    stock A short: 25 to 0 = 100% downside; profit +25

    stock B long: 25 to 100 = 300% upside; profit +75
    stock B short: 25 to 0 [again?!] = 100% downside; profit +25

    Novel thinking:

    stock C long: 100 to 200 = 100% upside; profit +100
    stock C short: 100 to 20 = 80% downside; profit +80...

    ...but wait. If you cash out and then reinvest the proceeds and short again...(profit formula: #shrs*(init price - close price))

    stock C short: x4 shares@20 to 4 = 80% downside; profit +64

    ...and again

    stock C short: x16 shares@4 to .80 = 80% downside; profit +51.2

    ...and again

    stock C short: x64 shares@.80 to .16 = 80% downside; profit +40.96

    ...and again

    stock C short: x256 shares@.16 to .032 = 80% downside; profit +32.768

    = total profit: +268.928

    I think my formulation is correct, but if anyone wants to check then do so.

    The plan is that if you keep reshorting you can make the process work.
  2. Ok. Keep reshorting in this market and you'll see how good your thinkin' is.
  3. garfangle,

    You must be truly bored. :)
  4. No, I am serious. The reason why the short technique works is because you can take your profits and reinvest them (reapply shorts) while the price is still falling (in your favor). You can't do this on the long side. Meaning if a stock jumps from 100 to 150, you can't sell it and reinvest the proceeds to get greater returns because you'd pay the same 150 for the repurchase.
  5. NET


    That looks allot like pyramiding a position. As profits accumulate, the proceeds are scaled into the position; certainly valid, not withstanding the risk considerations.
  6. All short positions must be done in a margin account, since you are borrowing the shares. As the price moves in your favor, your equity in the position increases. You can apply this equity as collateral and continue to increase your size as the trade works out. You don't have to cover and re-short.

    However, you can do the same thing if you are long and using margin.

    Here's the real short sale myth: "A long can only go to zero but with a short your losses are unlimited". People like to play up this point when they are making the case that short selling is evil and dangerous.

    Sorry, but if you are stupid enough to hold a trade to zero and not use stop losses, then you are too stupid to manage your own money and shouldn't be giving advice on the subject.
  7. md2952


    It depends on your time frame.Historically stock prices go up.If you are a trader,do not fight the tape.everything else is self evident.
  8. + NO capital gains tax on "terminal shorts" as you never take profit.

  9. Why not just add to your position with your excess margin once your short becomes profitable, instead of taking off the position? ... this would actually give you more buying power because maintenance margin is less than initial margin.

    Your theory is flawed because you are increasing risk significantly by continuously pyramiding, the same can be done of the way up.
  10. gaj


    i believe that stocks, over the 'long' haul, actually lose money far more than make.

    check out the big stocks of 100 years ago. many of them became virtually worthless, or were bought by other companies and became virtually worthless.

    that of course should have no influence on buying stocks NOW, but the long-spouted "stocks go up over the long haul" isn't true. indices (which change their listings) go up, but that's through artificial changes.
    #10     Mar 6, 2004