There will be charts and a spreadsheet with some wicked examples when I’m ready. For now, these are just running thoughts I’ll update when I get time. It will remain linked in the Notes Page If you want to check out Part 1, go here.
My mind is still on protection. This whole strategy revolves around risk management, more than the norm. So I keep placing the boxes or arrows all over the chart to theorize where I might start getting in with a short position and where to stop adding short. I’ll just start with the basic principle.
Above I’ve just drawn one of these arrows I’m talking about, and I drew a wavy red line on the screen. This is to visualize a “backward” move; I’m showing it in a simple range first. For those of you who already understand this well, go eat a hot dog or something. If I were to short sell UGAZ at $100/share with $10,000, I would get 100 shares. Then if the price goes to $300/share, that would be a 200% move up. I would need my original amount of money plus 2 times more to keep this position. I would need $30,000 to keep the broker from exiting the position and leaving me with, possibly $0. It sounds simple, but when looking at the chart that shows a 177% move up, from $387/share to $1071.99/share, it’s not as simple. I need a clear way to make sure I have a handle on this. Now for “the big” example.
The bright green arrow with the line at top and bottom is the biggest upward move UGAZ has ever made, 423.39%. Let’s assume I short UGAZ at $497/share, thinking it is going lower. If I spend $10,000 to short at $497/share, that’s 20 shares with some change left over. My cost is 20*497.2=$9944. If I were to just wait for this to turn into a gain, I’ll be waiting over a year, and the price reaches $2602.3 before I see a gain. Remember this is the wildest, to-date, scenario for UGAZ moving against a short position. I would need 20*2602.3=$52,046 to keep the broker from covering all of my shares of UGAZ and leaving me with $0 in my account. Also there is interest charged when shorting UGAZ. So if the interest rate averages to be 5% on an average price held of $700 from Dec 2017, to Nov 2018 or 330 days. This would be 20*$700/share*.05=$700/365*300=$632. I have no idea if this interest rate is accurate, I’m giving the example as something to think about. I’ve seen the interest rate higher, keep that in mind. So now I need almost $53,000 to hang on to a short position I got for $9944, before I’ll make a dime on the trade. The good part; if i continued to hold this trade until 1/3/2020, the price closes at $67.05. 20*(497.2-67.05)=$8603 – potential $1500 in interest = $7103. This is 13.4% in a little over 2 years. Life could be worse. The broker could need those shares back at $2602/share and I would still be left with $0. I’ll get to that part later. 13.4% in 2 years and 13 days isn’t a lot, but is one hell of a starting point.
The key here to remember, there was a 423% move that took over 5 times the amount of money and a little over a year to survive in order to make any money. So this is like one in a million right? Maybe, but let me give one more example.
Above, I’ve shown 2013/2014. I’ll shorten this up; basically a $10,000 short would require roughly $35,600 plus any interest that must be paid for over a year again for a short-and-hold scenario. Another occurrence similar to this one from March 2016 to March 2017; a year long move roughly 200% up before any money can be made.
So it’s important not to take on too much of a short position, obviously. I’m going to continue to use the 2018 scenario, since that is the most drastic. To plan my strategy around this would not be the most conservative, nor the most impressive; it is however, a starting point. There are two things I’ve talked up protecting against.
- Keeping the position covered with enough cash to prevent a margin call
- Taking a long position to protect against the broker taking the shares back
This post ended up being more of the same that I had forgotten I talked about in Part 1. Now I’ll get into how I plan to protect my account from total destruction, while attempting to make a little more than 13% in two years. I will get underway with Part 2. How to Protect.