(For those of you like me who suffer from truncation of the attention span: we were talking about differences between the long and short sides. I had said that a difference is that unrealized short losses make the position bigger and hence riskier, unlike unrealized long losses.)
I think you have just basically restated the fact that short losses are theoretically unlimited, and longs are limited. Since succesful traders do not let longs run down to zero and set their stoplosses equally away on both shorts and longs, there is NO difference for any trader.
Say you have $1000 in equity. You buy $500 worth of stock; the position is 50% of your portfolio value. Now the stock value goes to $400. Then you have $900 equity and your long position comprises 400/900 or 44.4% of it. That is, if the value of your position now changes by x%, the value of your total portfolio will change by (4/9)x%.
Say you have $1000 in equity. You short $500 worth of stock; the position is 50% of your portfolio value. Now the stock value goes to $600. Then you have $900 of equity and your short position comprises 600/900 or 66.7% of it. That is, if the value of your position now changes by x%, the value of your portfolio will change by (6/9)x%.
In the second (short) case, relative to the first (long) case, after the loss you have a larger portfolio exposure in percentage terms, i.e., you are less diversified, i.e., you have a riskier portfolio.
When analyzing risk (or return) it is always necessary to think in percentage (portfolio) terms rather than absolute ($amount) terms.
As to "consumes capital" -- without regard to any specific margin rules, i.e., thinking in general terms that would be applicable worldwide: For the portfolio with the long position, the amount of residual capital available for other positions is unaffected by the unrealized loss. But the portfolio with the short position must (in general and in principle) provide additional collateral to the stock lender due to the unrealized loss. Even more generally the difference between the two cases is that with the short, there is an external obligation to a (stock) lender which increases in value with unrealized losses, while in the long case there isn't such an obligation.
(Incidentally, FWIW, I am making observations which are not equivalent to an argument against all short sales. I frequently sell short. As I originally said, for a short-term trader who currently has a lot of liquidity, the disadvantage may be trivial.) |
