While a single short trade is limited to 100%, I don't think of short trading as being limited to that same 100%. Here's why. When you go long, you put $x at risk, and that amount grows over time if the stock appreciates, and if you're smart, you take some of it off the table so that you continually have something like $x at risk. When you go short, you need to apply the same thinking, but in reverse.
Let's say I short 100 shares of AMZN at $20. My account is credited for $2000. Prudent cash management (and many brokers) say I should keep $2000 in cash earmarked for the cover.
Tomorrow AMZN goes to $15. Now I really only need $1500 to cover (and my broker agrees), and I have $500 in paper profits. So I short another 33 shares of AMZN at $15. Once again I have $2000 in cash earmarked for the cover, but now for 133 shares.
Wednesday AMZN goes to $10. Now I really only need $1333 to cover, and I have another $667 in paper profits. So I short another 67 shares of AMZN at 10. Once again I have $2000 in cash earmarked for the cover, now of 200 shares at 10.
Thursday AMZN goes to $5. Now I really only need $1000 to cover, and I have another $1000 in paper profits. So I short another 200 shares of AMZN at 5. Once again I have $2000 in cash earmarked for the cover, now of 400 shares at 5.
So far I've made $2167 in profits on $2000 in risk capital.
The math gets much better if you do it in smaller increments, and take it all the way down to zero. Essentially you can get an infinite return on that $2000 in risk capital on a short, the same as on a long.
I only put this forth to explain the math; I am not advocating this as a trading strategy. I do incorporate elements of such a strategy principally on death shorts. I often add on rallies, generally about enough to put me back at the same risk capital level. And of course, I use stops to protect myself. I also reduce my exposure when the stock gets closer to fair value, which is why it works best on death shorts like AMZN, MPPP, ETYS, etc.
Hope this helps,
Fund |
