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root strategies
Short Shares
Analyzing the risk profile of a short share position
Risk Profile & Summary
Standard Setup
Short shares are established by shares for current market value. This is usually done in multiples of 100, so that it will pair nicely with any option strategy.
How It Works
When you short shares, you are essentially borrowing them from someone so that you can sell them in the market for high value. Your goal is to buy them back and return them for a lower cost than you sold them for, allowing you to keep the difference as profit. In order to do this, share value must decline from your point of sale. If share prices rise, you will have to buy them back more expensively than you sold them, which results in a net loss. Short shares have which means there is no limit to how much they can lose.
Note that short shares also incur charges. Depending on how difficult it is to attain shares of the product, interest fees can be anywhere from negligible to obscene. It is not uncommon to see interest rates at 200-400% or more per night as shares become hard to borrow, or if the is extremely
Why We Do This
You might sell short shares if you want static meaning delta that won't change with respect to share value. It is not the most nor a high strategy, so we won't be shorting outright shares very often. They usually come as a consequence of option Also, due to their unlimited risk potential, short shares tend to be heavily restricted by account size, account type, and product type at many brokerage firms.
Summary
| Assumption |
Bearish
Short shares profit when their market value decreases. |
| Cost Basis |
Credit
Cost basis is equal to the total amount collected for the shares (less fees, and payments). It can be improved by collecting a greater credit. |
| POP |
≈50%
We consider shares to have about a 50% probability of profit due to the randomness of the markets. They are essentially a coin flip. |
| Capital Requirement |
Moderate to High
Compared to many option strategies, owning shares can be fairly expensive – especially when trading in a such as a retirement account. may only require half of the total value of the shares, but that could also depend on your Short shares also require interest payments. |
| Break Even (before commission and fees) |
The break-even for short shares is simply the average share price (minus commission and fees). It is calculated by dividing the total credit received by the number of shares.
B/E = Credit ÷ # Shares |
| Maximum Profit |
Credit Collected
The most you can make on short shares is the amount of credit you collect when you sell them. This is calculated by multiplying the average share value by the number of shares. Max Profit = Ave. Share Value × # Shares |
| Maximum Loss |
Undefined
Because share value can rise without limitation, short shares have undefined risk. This means there is no limit to how much you can potentially lose. Be extra cautious about your position size when dealing with undefined risk. |
| Capital Allocation (per position) |
1-3% of
Generally, for a 50/50 bet, I don't like to risk more than 1-3% of my total capital. |
| Profit Target | I don't like to hold short shares for more than 1 day due to interest payments. If I end up with short shares, I will most likely try to close them at the lowest price I can get and replace them with an option-based equivalent. |
| Delta (P/L rate of change) |
Static, Negative
Short shares carry static negative delta. This means their delta will remain constant, regardless of price movement, and they are a strategy. The amount of negative delta is equal to the number of shares you are short. For example, 100 short shares is equal -100 deltas; 10 shares is equal to -10 deltas; 200 shares is equal to -200 deltas, and so on. |
| Theta (Time decay) |
None
Short shares do not carry a specific expiration date, and do not have a theta value. They can, however, drag P/L down over time due to interest payments. |
| Vega (Implied volatility sensitivity) |
None
Individual shares are not priced with an implied volatility component and do not carry a vega value. |
| Gamma (P/L Momentum) |
None
As mentioned above, shares carry static delta, meaning their delta value does not change. Therefore, they do not carry a gamma value. |