Thursday, September 03, 2015 3:58:36 PM
Another bagholder classic, and patently false.
With a constant amount of risk capital you can compound on the downside just like you can on the upside.
Simple example using a constant 50% margin requirement
Put up $500 margin and short 100 shares of ANY at $10 ($1,000 worth).
Stock drops to $8, you now have $700 in equity which allows you to short $1,400 worth of stock. But by that point you are only short $800 worth, so you have $300 excess margin. Can then short 75 more ANY ($600 worth) at $8.00.
Stock drops to $4. You now have $1,400 in equity ($500 initial margin, plus $600 profit on the initial 100 shares short, plus $300 profit on the 75 share short.
Right there on $500 in capital you have made a +180%
Now you have $1400 equity that allows you to be short $2800 worth of ANY, but you are only short $700 by that point (175 x $4), resulting in excess equity of $1050 (1400 less 350 margin). That $1050 allows you to short another $2100 at $4, or 525. So now you are short 700 (100 + 75 + 525).
Now it goes to zero. So you've made $10 on the first 100, $8 on the next 75, and $4 on the next 525.
Your profit on the above would be $1,000 + $600 + $2100 = $3700 profit (your account has grown from $500 to $4200). on an initial margin outlay of $500.
That would be a +740% return on risk capital in that example.
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