This is probably going to seem like a VERY basic question, but whatever, please don't insult me . Here's the question:

If you had shorted the Nasdaq in October 1999 at 2700, you would have lost 85% of your money in the next 6 months as the Nasdaq soared to 5000, correct? So $100 shorted ended up with $15 at the peak in March 2000. Then as the Nasdaq plunged 80%, you would have gained 80%, and the $15 would have grown to $27. Right? (I'm asking if you shorted at 2700, held during the rise to 5000, then covered at 1200, would $100 have turned into $27?)

Or does it work this way? Shorting the Nasdaq at 2700, you would have gained 55% eventually as the Nasdaq went to 5000 then plunged to 1200, so the $100 would have turned into $155. (1200-2700/2700 = -55%, inverse = +55%)

So what is correct? Shorting at 2700 while the Nasdaq soared to 5000, and then plunged to 1200, would you have ended up with $27 or $155?

not trying to be a dick here. . .
short: sell high buy low
long: buy low sell high

you sold it at 2700 and bought it back at 5000 = 2300 LOSS

Hogman,

But what if you didn't cover your short at 5000? Let's say you shorted at 2700, held during the rise to 5000, and covered at 1200. Does $100 shorted end up with $27 or $155 after you cover at 1200?

if you shorted at 2700 and rode it through (no margin calls, all cash) 5000 and back down to 1200, you would have made 1500

And it depends through what vehicle you "shorted" the Naz... But in the basic concept Hog (and you, I think) is exactly correct.

Tree, as Pat has pointed out it very much depends on what vehicle you used to short the NDX

Directly (?)
Options
Futures
Q's
etc

I will note - that many if not most people would get a margin call if they held a sizeable position on a short that far underwater.

having said that - to keep "shorting" straight in your head --

You enter the position, you sold shares you didn't own - but you "sold"

Whether you made a profit or loss depends on the price that you "buy" shares at to cover the short.

All that's really happening here - basically, anyhow - is that you are selling before you buy - the profit/loss is determined by your selling price - and your buying price ( when you "cover" the short )

It's not _exactly_ that simple - you have costs to borrow, and if the underlying security pays a dividend while you are short - you have to pay the dividend.

It's somewhat more readily explainable dealing with an individual stock rather than an index.

Bottom line here - if you bought (covered the short) at a price less than you sold - you made profit. If you bought (covered the short) at a price higher than you paid - you lost money

The sentence above then has to have trade costs factored in.

I agree with Hogman. Doesn't really matter if you went up to 5000. In at 2700, out at 1200.
(2700 - 1200 = 1500 profit)
I think it simplifies the math if you reverse it.
(2700 + 1500 = 4200)

2700 = 100
4200 = x
cross solve
2700x = 420000
x = 155.5

Use negative shares to keep track of what you "owe".

E.g., starting initially with 100 dollars @ 2700 you owed 0.037 shares

2700 * -0.037 = -100 <== it will cost 100 to cover the bet
5000 * -0.037 = -185 <== it will cost 185 to cover the bet (loss of 85)
1200 * -0.037 = -44.4 <== it will cost 44.4 to cover the bet (gain of 55.6)

Shorting is still "buy low, sell high".

It's just that you perfrom the selling *before* you do the buying.

Other than daytrading short, I believe shorting is a *very* sophisticated strategy that very, very few traders can execute. I believe it is disfavored both statistically and by almost all aspects of the way the market actually behaves. Because:

In my experience, the market spends about 45-65% of its time rising, about 30-35% of the time doing nothing, and about 15%-25% falling. So (if you accept the premise) shorting is odds-challenged simply on the basis of time. If you don't accept the premise, then you don't.

Shorting requires surgical, high precision entries, and, as we have seen for 2+ years, is ALWAYS vulnerable to market pumps from sources unknown and unknowable. The result is an inability to let winners run when short. Whereas going long you can have the sloppiest, clumsiest entries imaginable, and in the last 2 years you have NEVER had to wait more than 3 days to be made whole. Knowing that gives you lots more confidence holding onto positions for much bigger gains than are generally available going short.

Going long, you can definitely lose money and make plenty of mistakes. But the guys who are carried out of the market on stretchers are in 90% of cases shorts.

I believe that most traders who have a tendency to go short are at some level pessimists, and that is a built-in bias that I find not helpful to trading. Except in very, very few cases you do NOT get paid to trade as if your trading is an indication of "truth". NOBODY gets paid, for example, doubting government numbers when they come out. NOBODY gets paid who doubts that Fed activity will "work".

I also believe that for 90+% of traders, if they NEVER, EVER shorted stock, NEVER heard about it, NEVER did it, but instead strictly concentrated on opportunites to go long and concentrated on learning how NOT TO BE IN the market during unfavorable times, they would outperform their permabear compadres by minimally 3:1 and outperform casual shorts by an indeterminate amount. But outperform them nonetheless.

Good points Gamma, but in these times there is big money to be made looking at the fundamental problems which present in such a structural/mathematical way in the markets right now. I would think that anyone who buys something like a Ultra short ETF say..right now..and watches things unfold over this next year or so stands to do VERY well with a modicum of actual "work". Its timing, but its almost kind of a no brainer I would think. I admit that is being very pessimistic but I'm pretty much in that camp at this point. I'm very tempted to put a large sum of money into something like SDS right now.

I'm just too chicken **** to do it though ;)

Quote:

I would think that anyone who buys something like a Ultra short ETF say..right now..and watches things unfold over this next year or so stands to do VERY well with a modicum of actual "work"

You definitely don't want to be holding an ultrashort for 12 months.

There's a time decay involved with the Ultras.

Pilot, I tried to confine my answer to things not especially related to "these times".

If you bought such a fund, even though that fund would benefit from a decline in the market, in other words, it would have a "market short" stance, YOU would be a long. You would OWN the fund long. (Just a point of clarification) That is quite different from being SHORT a security.

Quote:

Its timing, but its almost kind of a no brainer I would think. I admit that is being very pessimistic but I'm pretty much in that camp at this point.

You are being "pessimistic" about the number that will appear to the right of the "DJIA" or "NASDAQ" legend in the sense that you believe that those numbers will, at some point in the future, be smaller. Fine. The point of my post is that you are *probably* being *optimistic* about your ability to capture that move. I use the word *probably* to indicate odds, not to characterize your market savvy or timing or capitalization or ability to withstand counter moves against your position or anything else about you, about which I know nothing.

It is my opinion and opinion only that except for very specific times in market history, longs have a temporal advantage in that the market has a tendency to work higher over time, just because, as I said, it's my impression that the mkt rises about 45-60% of the time, does nothing about a third of the time, yet falls only about 15-20-25% of the time. Can you thread that needle? Can you thread the needle of having these endless interventions and currency interventions slosh into the market? Sure. You can. The odds are against you, that's all I'm saying.

And I would bet you a quarter that if you took a chart of the DJIA, NAS, or SPX over the past 2 years, threw a dart at it, and arbitrarily went long at that point, not only would you have made money, you would have made money in AT MOST a month and change, and much more frequently, mere days, single number of days. If you did the same exercise going short, I would bet that same quarter that you would have lost 70% of the time right off the bat, defined as getting stopped out against any kind of prudently placed stop. Any time you DID make money was probably a pretty short duration trade. But this is a sloppy argument and it is also a "these times" argument.

Now you could say that the mkt is overextended here, and indeed, I just heard on the radio even as I write this post that we haven't had a 1% down day since before T-giving. All that is fine. Just because we are or may be overextended (and, that is my view too) does not mean that a *harnessable* downside move approaches.

"The odds" include some things you can sort of quantify (like my 45-33-25 rise-flat-fall "rule") and things you cannot quantify...like Friday's news that despite a 20 year battle to force the CFTC to enforce its own position limits against JPM and HSBC in the silver market; despite the interim passage of Dodd-Frank, despite the exposure of the long-suspected overwhelming market short position of JPM in the silver market that would be illegal (by comparison to the total volume of the market) in ANY other commodity....JPM is STILL ALLOWED to maintain its existing positions. IN other words, it's yet another in a seemingly endless series of regulatory capture moments.

http://www.chrismartenson.com/blog/jp-mo....

I missed the part where it said JPM held this position for it's own account. They have done nothing wrong here according to the evidence supplied. They're a ****ing clearing house- position limits do not apply to them in that capacity.

So you are saying...in the well over a decade that this controversy has been brewing and the well over six months the actual CFTC has heard this complaint, that JPM has never brought that up, nor the CFTC as a defense?

Me? I am saying they did bring it up and that's why the CFTC is saying "no problem here."