The Perils of Shorting: A Real Life Example

This is very confusing, unless I've got completely wrong data. You're saying Tesla is not being shorted?
26% of the total volume of Tesla shares were shorted yesterday.
The latest I've seen on IRES is <1% of their shares are shorted.
 
Colm Fagan said:
Brendan, would you really have admitted defeat?
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Hi Colm

That was my plan anyway and I don't have the same risk appetite that you have.

I remember the dot.com bubble thinking that shares were way overvalued and they doubled further.

If I had known about it, I would have sold bitcoin at $1,400 three years ago, only to watch it rise 10 fold after that.

I will face the same issue when Bitcoin falls to $3,000. I know that it's still worth nothing and will eventually fall to zero, but I will have made enough at $3,000 to cash in.

Brendan
 
RedOnion said:
This is very confusing, unless I've got completely wrong data. You're saying Tesla is not being shorted?
26% of the total volume of Tesla shares were shorted yesterday.
The latest I've seen on IRES is <1% of their shares are shorted.
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Yes I take your point, but as you well know shorting is very dynamic activity, therefore in the case of Ires it was the target of shorters until they achieved their price move then they move off as it is too risky for them and the stock is too cheap. Obviously Tesla is the opposite because the price has risen so much it is now ripe for shorters. Those markets change very quickly by the hour. But they feed off assumptions and themes as I discussed above
 
Does the high level of shorting of Tesla stock add an extra layer of danger , I'm just imagining the more the stock rises then shorters closing positions are going to contribute to the stock rising further again as they have to buy.
 
Fella said:
Does the high level of shorting of Tesla stock add an extra layer of danger , I'm just imagining the more the stock rises then shorters closing positions are going to contribute to the stock rising further again as they have to buy.
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Yes, without talking about specific shares.
Google 'short squeeze'. Some hedge funds start essentially betting that there'll be a squeeze rather than investing based on the fundamentals of the company.
 
Presumably the short squeeze is only a temporary phenomenon?

Neither shorting nor squeezing can alter the fundamental value of a company. (Unless excessive shorting ruins confidence in a company.)

So a short squeeze might well force out a few Tesla shorts in the short-term but it wouldn't affect a long-term shorter like Colm.

Brendan
 
Brendan Burgess said:
So a short squeeze might well force out a few Tesla shorts in the short-term but it wouldn't affect a long-term shorter like Colm.
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Absolutely.
If you've enough funds to cover it, you're fine. But there are examples of hedge funds running out of funds to cover their positions.
 
Colm, I am trying to analyse the math behind these two statements. I presume that you see the risk of a percentage movement of x% as being broadly constant across the price range. That would mean Tesla would need to more than triple in price before it matched the risk on your largest long holding. You would have taken a bit of a hiding by the time the Tesla share price was over 1200.
 
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Hi Duke
First of all, I'm making this up as I go along, so don't take what I'm saying as gospel. This is a new experience for me too!
My thinking at present is that I will be comfortable to allow my absolute exposure to Tesla to increase to the level of my third largest (long) holding. I'm still some way from reaching that point (which I don't plan to divulge). If the price increases beyond that, the (tentative) plan is to close the short position in enough shares to keep my absolute exposure at that of my third largest holding. Thus, if the price keeps rising, I will keep buying back shares. Taking your example, if the price ever gets to 1200, I will have exposure to a much smaller number of Tesla shares (I'll also be a heck of a lot poorer!).
As I think I said earlier, all this presupposes that I continue to believe that Tesla is ridiculously overvalued. If I ever change my mind and conclude that there's a reasonable chance that its fundamental value is close to the current market value, then I'll close the entire short position immediately.

There's an important postscript. All these transactions are taking place outside my ARF. I wouldn't be allowed by law to have spread bets in the ARF in any event. That means I'm unlikely ever to end up on the breadline!
 
The best piece I've ever read on the dangers of shorting is the blog:

https://lt3000.blogspot.com/2018/08/the-real-cautionary-tale-of-david.html

If I had seen it before I opened my Tesla short, I might have done things differently!

I've extracted a few quotes to give a feel for its quality:

* "Consequently, a long value, short growth book is almost certain to cause you tremendous pain from time to time (and particularly late cycle)"

* "To succeed as a value investor, it is absolutely essential that you are investing from a position of strength not weakness, and have the ability to 'stay the course' when markets move against you, but the risk of being a forced buyer as a short seller is very real."

* "A clear mark of a flawed investment thesis is that it makes no reference to price"

* "In markets, there is no such thing as a mechanical rule which always works - judgement and rationality in each individual situation are what matter."

There's lots more of similar quality. Enjoy! It's my Christmas present to AAM readers!
 
the problem with shorting bitcoin, is that you might have a number in your head for your stop loss as to what you want to risk, but you need to check the resistance levels aswell as these wicks can take you out really quickly. Sometimes these resistance levels can be just outside your stop loss that you have in your head so you need to consider that when playing the trade
Same scenario goes for a long
 
Colm I find it odd you don’t want to divulge the price. In fact it makes me sceptical you’re being honest with yourself.
 
Thanks for the pressie. Some thought provoking stuff, not least that some genius called Einstein or whatever made a complete fool of himself causing his fund to lose 30% in a bull market.
As someone who likes to follow the math I was interested in the observation that with a short if things go against you in the short term and you want to maintain your risk exposure you have to lessen your bet and thus ultimately make less than you initially expected even if you are proven right in the end. And vice versa for a long bet. But I always look for the mirror of these examples. What he is saying is that if you maintain the same risk exposure but are ultimately proven right your actual profit will be path dependent. With a short, if that path initially goes against you your final profit will be reduced compared to your initial expectation and vice versa for a long position. But if the path follows your judgement the situation is reversed and the long position delivers less than your initial expectation and again vice versa for the short. One up for the short since presumably on balance you believe the path will follow your initial judgement.

Then we see the ubiquitous 100% rise has the same chance as a 50% fall. Most buy into this log symmetry but it suggests that shorts in general are very poor value bets in the sense that you are getting less than even money on 50% outcomes.
 
Bronte said:
Colm I find it odd you don’t want to divulge the price. In fact it makes me sceptical you’re being honest with yourself.
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You may be right! As I admitted, I'm in new territory with how my Tesla short has developed, so I'm making up the rules as I go. I'm also trying to digest the lessons from the excellent blog I recommended last night (which @Duke of Marmalade also quoted. Duke, not having your maths ability, it will take me a while to get my head around your argument, but I hope to eventually).

Another response to Bronte's point is that I'm more comfortable telling what I've done than what I plan to do, which is related to my final quote from lt3000's excellent blog:
Colm Fagan said:
"In markets, there is no such thing as a mechanical rule which always works - judgement and rationality in each individual situation are what matter
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The world may look quite different by the time I have to make the call on whether to close part of my Tesla short position.
 
I don't get how you would still be involved Colm if the price ever got to 1200 , if I was sure something was over valued at 300 and then it moved to 1200 I would be well out of the market I would cut my losses well before that and admit to myself I just have no clue where this company is going. If I was short 300 I think I'd be out before 500. Tesla can hang around over valued for years until it eventually is valuable , I really am struggling to see the edge here .

I'll be honest since I have exhausted / fell out of love with most avenues in the sports world, I have put aside a sum of money with which I am going to risk trying to trade the financial markets , its why I have questioned so much and I have learned a lot from this thread. I have looked at how share prices have moved and there is no clear pattern that I have identified , there are no areas that stand out to me yet. My feeling is that the time to make real money is when we hit a bear market .
 
joe sod said:
I dont understand this statement, that would mean a rise from 100 to 200 has the same chance as a fall from 100 to 50, really !!, explain
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LT3000 said:
The two are inversely equivalent, geometrically. A 50% decline from $100 to $50 requires a 100% gain to get back to $100; and a 100% gain from $100 to $200 requires a 50% decline to get back to $100.
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Okay, it's not quite what LT3000 said.
Most models of the stockmarket are at least approximately "geometrically" or "log " symmetrical. Thus it might assume that on average we expect a 5% rise with the chances of being -100% to +5% being equal to the chances from +5% to +infinity%. Thus in absolute terms the lower half only spans 105 percentage points whilst the upper half spans an infinity of outcomes. This wouldn't make sense if we say had the chances of being 50% below 105% the same probability as the chances of being 50% above 105%. What for example would be the equivalent downside to say a +500% upside. The most common way to resolve this is to take logarithms and this in effect means the chances of being 1/x times our expected return of 105 is the same as the chances of being x times it. (log (1/x) = -log(x)). taking x = 2 that means the chances of 1/2 are the same as the chances of 2.
Sorry, I'm sure I made a hash of that explanation. But there is sort of common sense behind it.
 
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