NYBB,
<<Sheldon - The Big Short Money has been made on Zitel. If you had shorted @ $12 or so your profit right now considering the time value of money is great. The opportunity cost of waiting for the demise of "The Zit", another 2 -3 points, is not worth the potential reward. There is also a small possibility of a prolonged lull in the price or something could go right.>>
Perhaps your broker treats your short sales differently from mine, because my profits to date are mine already, free and clear. The fact that I shorted ZITL at a price higher than it is today is irrelevant - all that I need to do to maintain my position is:
1: keep the current market value of the stock set aside, in cash, in a non-interest-bearing account. As of last night, that was $3.19 per share.
2: keep 30% of the above amount worth of "margin" in my margin account. This can be 97 cents worth of cash (which is what I have chosen to do), which will earn interest, or it can be any securities which give me 97 cents worth of "buying power". For example, I could keep $1.91 worth of IBM stock in my margin account for every ZITL share I am holding short, if I wished to invest in IBM. Or I could keep $1.01 worth of T-bills in my margin account for every ZITL share I am holding short.
Where is the "time value of money" that I am sacrificing? As far as I can see, the opportunity cost of me holding my ZITL short consists of two items:
1: I earn no interest on the marked-to-market value of each share I continue to hold short.
2: I am obliged to keep a certain amount of ongoing investment in my margin account. In fact, prudence would suggest keeping far more value here than the minimum required by my brokerage, so that I am not vulnerable to being squeezed out.
Since I do not wish to close down my account, item (2) does not count, for me. Item (1) is a cost that I feel is a reasonable one to bear, since I believe ZITL will trade below $1 within five years (possibly sooner).
In fact, depending on where the short position was initiated, the tax consequences of closing out a position vs. keeping it open might actually mean that holding the position open carries a negative opportunity cost
- Daniel |
