Barb, you are exactly right and superbly articulate, as usual.
The point is not that a single short trade has the same rate of return or dollar return as a long trade - the long on the way up and the short on the way down.
Anthony is right that it's the same dollars, but only if one puts more capital to work on the short side.
Example
Bob Long buys $1,000 of ADSP at $5, sells at $50 - 200 shares.
Barb Short sells short $1,000 at $50 and covers at $5 - 20 shares.
If they both invest $1000, Bob ends up with $9,000 profit. Barb nets only $900. With the same capital at risk, Bob earns 10 times what Barb does.
However, let's say that to hit that 10 bagger, Bob has to put $1000 on 20 different stocks. That's $20,000 invested for a profit of $9000.
Barb has to put it on only two, let's say. She puts $10,000 on each. One doesn't move , but the other goes back to $5. Her $20,000 nets a profit of $9000 too.
Now pick your variables and plug them into that formula, and you find out if you prefer short or long. I prefer short.
P.S. I know there are several holes in this description, caused by over-simplification. But that's generally the way it works.
peter |
