answering a question about short selling stocks

By: ispeculatornew
Date posted: 02.06.2009 (4:00 am) | Write a Comment  (1 Comment)

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“I read your post on Million Dollar Journey today and checked out your site.  I liked some of the ideas, and while I won’t invest based only on your trades, they are some interesting thoughts to add to the mix.

But, after reviewing your site a little I didn’t find a basic primer section.  I’m not a beginner investor, but I don’t normally short stocks.  I do like the idea of hedging that you’re doing.  But, do you have advise as to how to best do it?  Is it a 50/50% thing?  50% long 50% short (per dollar?).

Thanks.  I look forward to reviewing your site.”

Thanks a lot for the email. Actually, the idea behind shorting stocks is one I’ve been experiencing with for a while now. My day job is close to the hedge fund industry and you technically have 2 types of funds:

-Market neutral: Generally maintain a $ exposure of 50/50

-Long/Short: More what I’m doing which is get some flexibility, and yes on most picks I would be 50/50 but I could be outright long or short.

I like the long/short mainly because you are trying to get a sense of the discrepancy between 2 stocks rather than on the overall market.

When shorting a stock, you will generally have to specify that you are doing so because your broker will have to borrow it. Because you are 50/50, no money is needed up front (except for commissions). But generally brokers will require a margin because of your short position. It will depend on stocks and so on but as a general rule I use 70% of the short value. So you will be paying for the borrow but getting interest on your cash, which should offset each other (or close).

Here is an example of my last trade:

LONG PCLN:                150 X 66.28$=9942$

SHORT AMZN:              -170X 58.51$=9947$

Overall, the trade cost had a cost of -5$. However, given the risk in a short position, the broker will ask me to have about 70% or close to 7000$ in my account.

Then the broker will charge me a cost for borrowing the AMZN shares but will give me interest on the 7000$ in my account. The two will be close to offsetting each other.

When closing the trade, I will do the opposite, so sell PCLN and buy AMZN. So I’m looking to have PCLN have a better performance to AMZN, it’s the only thing that matters to me.

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  1. […] Speculator answers a question about shorting stocks.  There is a clear explanation of how that […]

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