How I Caculate Returns For Long And Short Tech Picks

By: ispeculatornew
Date posted: 01.20.2012 (5:00 am) | Write a Comment  (8 Comments)

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You might think it’s obvious right? I mean you buy and sell a stock then depending on the return, you can calculate a return. For example:

I buy 100 shares of Microsoft at $26.11 and sell them for $28.25. What is the return?

100 x (28.25-26.11) = $214 profit

Return = Profit / Invested Amount = $214/$2611 = 8.20%

I got an interesting question from a reader that is replicating some of the trades being done here regarding how returns are being calculated.

For long and short trades, that is different. To make my case, I will explain using my 1st trade of the year where I went long Apple (AAPL)and short Blue Nile (NILE). If I am managing a portfolio worth $35,000, and investing 1/7 of that amount in each trade (as per my 2012 trading changes), then I basically have $5000 in each trade.

So on January 5th, I bought Apple (AAPL) and sold Blue Nile (NILE). Keep in mind that there is “no cost” (excluding commissions) to entering into this trade. What do I mean? With $5000, I will be able to

Buy for $7150 worth of Apple (AAPL)
Sell for $7150 worth of Blue Nile (NILE)

That will leave me with the same amount in my account ($5000), an amount that I need to keep as “collateral” for my position. With this amount I am able to:

Buy 17 shares of Apple @ 410.00
Sell 175 shares of Blue Nile @ 40.69

Then, a week or so later, I closed the trade:

Sold 17 shares of Apple @ 419.70
Bought 175 shares of Blue Nile @ 35.47

The profit is:

Apple $165
Blue Nile $914
Total $1079

So on the $5000 that I was using to open this trade, I made a return of 21.6%. As you can see in the “Stock Picks” page, that is how I’ve been calculating returns. The other way would be to calculate the return as follows:

Return = Profit / Bough and Sold amount

In my opinion, that would not be representative however since for a total of $35,000 in the account, I would be buying for $50,000 of shares and selling the same amount.

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8 Comments

  1. Comment by Jai Catalano — January 21, 2012 @ 7:06 am

    21.6% is a nice day. Congrats. Fun post to read on calculating returns.

  2. Comment by IS — January 21, 2012 @ 8:42 am

    @Jai – Thanks a lot, doing our best:)

  3. Comment by Pho — January 21, 2012 @ 9:49 pm

    Suppose in this trade that AAPL remains constant but NILE goes up $950. This is not enough to trigger the stop loss, since the return would be -19%. However, the collateral is not sufficient anymore. Typically, one would need
    (7150+950)*1.3-7150*0.7 = 5525
    but there’s only $5000 sitting in the account. That would result in a margin call. Actually this is the case as soon as NILE is up $550 (while AAPL remains at $7150), which is only +7.7%.

    With a stop loss at 20%, one can buy and sell for $6150 worth of each stock. In the worst case scenario, the margin call would then happen at the same time as the stop loss is triggered.

  4. Comment by IS — January 21, 2012 @ 10:31 pm

    @Pho – Sure that makes sense but I personally prefer to manage these positions with the stop loss only. Anyway, I hold other Long only positions (longer term) in the same account so I’m never really worried about margin calls… becomes much much more tricky when you have to worry about those coming in.

    Thanks a lot for the comment

  5. Comment by Pho — January 22, 2012 @ 10:24 am

    @IS – My point is about the affirmation “I will be able to Buy for $7150 worth of Apple (AAPL) and Sell for $7150 worth of Blue Nile (NILE)”. This is true as long as $5000 is enough as a collateral. But this is not the case as explained in my previous comment. What is enough is $5000 PLUS some long only positions. But then it is not fair to calculate your return on $5000 only.

    As an (extreme) example, if i had a $20000 long term long only position, i could buy AAPL and sell NILE with no cash in my account. The $20000 position would be more than enough as a collateral for NILE. In the end i would have made $1079 with $0 investment which is pretty good. 😉

    My calculation for the return of the AAPL/NILE trade is as follow. With $5000 i am able to buy and sell for $6150 worth of each stock (then $5000 is enough as a collateral as long as the trade return remains above -20%). My profit is $142 (AAPL) + $786 (NILE) = $928 which gives +18.6%.

    By the way i’d like to thank you for maintaining this site and publishing very interesting trade ideas.

  6. Comment by Hans — January 23, 2012 @ 7:54 pm

    I use an additional metrics, which I refer to as the APR or annual percentage return.

    In other words, a six month gain of 10%, results in a 20% APR.

    This allows one to compare results against other indexes on an annual bases…

  7. Comment by Intelligent Speculator — January 23, 2012 @ 7:59 pm

    @Hans – Very interesting, thanks for letting me know about that. Where did you hear about that?

    @Pho – Wow, thanks all of that, so appreciated. I do appreciate the input and yes you are right, specifying that I would also need long positions would be important, that does give me ideas for future posts. Thanks so much for sharing!

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