My “Ultimate Guide” to shorting UGAZ: Part 2a: How to Protect – by Layering

This part should go fairly quick and I should not talk in circles this time. I’m going to refer back to the same timeline I’ve been using, Dec 21, 2017 to Jan 3, 2020. I want to cover every detail that I can. For one thing, I still don’t know myself how all this will unfold completely. I have theories in my head that need to be tested.

For this part I will layer into the position vs just taking on a full short position.

UGAZ chart on Daily leading up to Dec 21, 2017, using Tradingview.com

We know Dec 21 was a significant bottom for UGAZ because we can see on the chart. If I just started with the idea of shorting UGAZ on that day, in 2017, would I or should I have taken a max short position of 18% of my account value all at once? Fundamentals have the answer. I’d like to compare that moment, in 2017, to right now.

UGAZ Feb 2019 to Jan 2020 on daily chart at Tradingview.com

After a long run down , and the price is closer to a bottom than a top, should I short UGAZ with 18% of the funds in my account? The answer to this is going to be far different for everyone. I could max out at 18% and just chance it. I could go long with something else to protect it, which I’ll get to next. For now I want to stick with “Layering-in”. I want to compare a simple plan for layering into a position with the Short-and-Hold example.

As for my answer; I would not, in any way take on a UGAZ short right now with 18% of my funds without a spike in the price. Fundamentally, a small short here is worthy of attention, but not 18%. Not yet. On to the data.

In the chart below, I’m zooming in to the beginning of the range I’ve been discussing. Early on there is a substantial move upward in UGAZ. I want to use this to show how much difference layering into the position can make. So just off the top of my head I chose to plot these lines roughly every 10% move higher. I started Dec 21st with 2 shares, and added 2 shares with each close that was roughly 10% higher than the previous. There is a gap from $600/share to $700/share, so I added a couple of layers close together there.

UGAZ from mid Dec, 2017 to late Jan, 2017
UGAZ short and hold – Layering into the position

I changed a few layers just to see how the chart would turn out, mostly sticking to the UGAZ layers above. I want to point out here the maximum Funds needed to cover the UGAZ short is around $10,000 less than originally. Also the pre-interest gain made on Jan 3, 2020 is $10786, with a maximum of 16 shares shorted. I only layered into the first move backward to show how much difference the results can be with a fairly small change in how UGAZ is shorted.

UGAZ short layers in Excel document

Above is a screenshot of the data sheet of my spreadsheet. You can make a copy or download the spreadsheet and manipulate the sheet if you like. The highlighted column is the “number of shares” you want to be holding at that time. You can increase or decrease (with a positive number, the sheet assumes this is a short position), the sheet will adjust the average of shares held with each increased short, and will hold onto any gain/loss when the position is reduced. I’m just getting warmed up with my analysis of this. Look forward to more in the following posts.

To read my other posts on this series, go to my Notes page.

Oldinvestor

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