DAYTRADING Fundamentals Message Board

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Strategies & Market Trends : DAYTRADING Fundamentals

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To: brec who wrote (8105)	4/29/2000 5:00:00 PM
From: OZ	Read Replies (1) of 18137

I still maintain that in regards to CAPITAL CONSUMPTION and ACCOUNT RISK there is NO DIFFERENCE except for the fact that the long position will potentially do less damage since you cannot lose more than the value of the stock and on a short the losses are unlimited. SIMPLY STATED: If I hold long 100 shares of a 50 dollar stock and it goes down 10 points it depletes my account capital by (10 x 100) or $1000. And deletes my buying power by $2000. in a margin account. If I am short the 100 shares and the stock goes up 10 points it depletes my account by $1000. and my buying power by $2000.. This 1:1 relationship continues as a 1:1 relationship wether it is a 10, 20, 30, 40 or 50 point gain or loss. All elements of risk and as you said "capital consumption" ARE identical, that is up to the point the long holders stock drops 50 and he cannot lose anymore and the short holder position goes up 50 and his problem can continue to infinity. I do not see how a short "adds more capital" (depletes buying power)and increases risk over a long. The only capital added to the account on a short is what you sold it for. This is a FIXED amount(which in fact earns interest and minimizes risk). One other caveat is that the minimum maintenance margin on a short is 30% and 25% on a long. 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% Sound pretty accurate. Main point is that the value of a long is determined by (paid)-(sold) and in this example the answer is -100. Then you take what the stock cost and subtract the 100 to get the 400. The answer is 400 because of the equation and not simply because that is the present cost of the stock.This equation must be used on the short trade too as I will explain. 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 $900 of equity and your short position comprises 600/900 or 66.7% of it. That is, if the value of your position now changes by x%, the value of your portfolio will change by (6/9)x%. This is not totally accurate. The value of a short is determined by (sold or 500)-(paid or 600) and in this example the value is also -100. Then you take what you sold it for (500) which is known as a CR or credit register and subtract the 100 loss and you get the same 400 again. You do not use 600 (which is known as the SMV). It is no longer relevant to the transaction once it used to compute the actual loss (or gain) of the position. Once you plug in the 400 then everything about the risk and capital consumption (depletion of buying power) stays the same. When analyzing risk (or return) it is always necessary to think in percentage (portfolio) terms rather than absolute ($amount) terms Agree completely. I just think one has to know how to properly calculate exposure for a short position versus a long position. Curious to here some input from others. regards, OZ

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