Short Selling Strategy for Value Investors


The perils of short-selling can be summarized in a simple statement: “Upside is limited to 100% but downside is unlimited”. Some of the famously successful short-sellers such as George Soros are known to use strategies that limit the downside risk to less than the size of the initial short position while increasing the upside potential over 100% by using variations on the following strategy:

  1. Set up stops at higher prices to close parts of your position, if the stock moves against you. The amount to close should be such that the size of the position remains at ~1%.
  2. Set up entry points at lower prices to add to your short position, if the stock goes down. The amount to add should be such that the size of the position remains at ~1%.

An example follow:

  1. Say your portfolio size is $100K and you want to start a 1% short position on XYZ stock priced at $10. So, you short 100 shares at $10.
  2. If the stock doubles, close the short position and your loss will be $1K, or 1% impact to your portfolio. So, your losses are capped at 100% of your initial position. The same strategy can be used to close parts of the position at more granular points rather than waiting for the stock to double before closing. That can reduce the downside risk even more. In our example, if you dispose 50% of the position when the stock increased by 50% ($150) and disposed the rest when the stock doubled, your total loss is 75% of your initial position.
  3. If the stock drops 50%, increase the short position so as to keep the size of the position relative to the portfolio size constant at 1%. This ensures that the portfolio impact will be more than 1%, or more than 100% of your initial short position. In our example, if the stock drops by 50% to $5, sell short another 100 shares so that the size of your short position remains at 1% of your portfolio (200 shares * $5 = $1K or 1% of your portfolio of $100K). At this point, you netted a total of $1.5K by selling short the 200 shares. Now, if the stock goes to zero, your profit would be $1.5K or 150% of your initial short position for a 1.5% overall portfolio impact. The strategy can be used in a more granular fashion to increase the return potential even further.


Related Posts:
Last Updated: 04/2012.

No comments :

Labels

401k ( 15 ) ACT ( 1 ) AP ( 4 ) ARIUS ( 1 ) Abad Turtle Beach ( 1 ) Abrams Capital Management ( 5 ) Acoustic Electric Guitars ( 1 ) Acoustic Guitars ( 1 ) Activist ( 4 ) Address Change ( 2 ) Advanced Placement ( 4 ) Akre Capital Management ( 18 ) Alex Roepers ( 5 ) Appaloosa ( 15 ) Arlington Value Capital ( 3 ) Atlantic Investment Management ( 5 ) Ayemenem ( 1 ) BDCs ( 3 ) BP Capital Management ( 2 ) Bangalore ( 3 ) Bangkok ( 2 ) Bannerghatta National Park ( 1 ) Battery Park ( 1 ) Baupost ( 2 ) Baupost Group ( 17 ) Benjamin Graham ( 2 ) Benjamin Graham Model ( 2 ) Berijam Lake ( 2 ) Berkshire Hathaway ( 35 ) Bill & Melinda Gates Foundation ( 45 ) Bill Ackman ( 19 ) Bill Gates ( 44 ) Blue Ridge Capital ( 16 ) Blum Capital Partners ( 12 ) Boone Pickens ( 2 ) Brave Warrior ( 3 ) Brave Warrior Advisors ( 20 ) Bruce Berkowitz ( 19 ) Bruce Fund ( 38 ) CANROYs ( 7 ) CBRE ( 2 ) CEF ( 2 ) CLEP ( 1 ) Camcorders ( 3 ) Cantillon ( 12 ) Carl Ichan ( 8 ) Casio ( 2 ) Charles Akre ( 15 ) Charlie Munger ( 41 ) Chase Coleman ( 16 ) Chou Associates ( 29 ) Christmas gifts ( 7 ) Christopher H. Browne ( 7 ) Chuck Akre ( 13 ) Cisco ( 2 ) Class Action Settlements ( 2 ) Coatue Management ( 28 ) Cochin ( 2 ) Consumer Product Reviews ( 29 ) Covered Calls ( 2 ) DAT ( 1 ) DCF ( 2 ) Daily Journal ( 38 ) Dalal Street ( 8 ) Dan Loeb ( 10 ) David Abrams ( 5 ) David Einhorn ( 22 ) David Swensen ( 17 ) David Tepper ( 15 ) David Winters ( 15 ) Digital Piano ( 3 ) Dinakar Singh ( 20 ) Donald Yacktman ( 10 ) Duquesne ( 34 ) ESL Investments ( 14 ) ESPP ( 6 ) ETF ( 2 ) ETN ( 2 ) EXPLORE ( 1 ) Education ( 37 ) Edward Lampert ( 21 ) Egerton Capital ( 43 ) Egypt ( 3 ) Elementary Education ( 10 ) Elementary School Textbooks ( 5 ) Eric Mindich ( 13 ) Eton Park ( 13 ) Everyday Musings ( 58 ) Exam Prep ( 7 ) Exiting the rat race - how to? ( 19 ) FD Laddering ( 1 ) FVE ( 2 ) Fair Value Estimates ( 4 ) Fairfax Financial ( 4 ) Fairfax Financial Holdings ( 14 ) Fairholme ( 19 ) Fairpointe ( 28 ) Family Office ( 18 ) Financial Independence ( 93 ) Fisher Asset Management ( 10 ) Flash Camcorders ( 3 ) Flip ( 3 ) Francis Chou ( 29 ) Frugal Living ( 34 ) Fund Holdings ( 961 ) GMAT ( 1 ) GRE ( 1 ) Genting ( 2 ) Glenn Greenberg ( 24 ) Glenview Capital ( 18 ) Google ( 2 ) Gotham Asset Management ( 7 ) Greenlight Capital ( 22 ) Guitars ( 3 ) HELOC ( 1 ) HOA ( 3 ) Half Marathon ( 2 ) Hawaii ( 2 ) Hedge Funds ( 1230 ) High School Education ( 7 ) High School Textbooks ( 6 ) Holidays ( 3 ) Holyland ( 11 ) Home Improvement ( 2 ) Homes ( 18 ) Homeschool ( 18 ) Houses ( 2 ) Housing ( 3 ) Hykon ( 2 ) Ian Cumming ( 15 ) Icahn Enterprises ( 6 ) Infinuvo ( 6 ) Insurance ( 3 ) Investment Portfolio ( 96 ) Investment Research ( 10 ) Investments ( 7 ) Irving Kahn ( 17 ) Jason Maynard ( 10 ) Jefferies ( 2 ) Jeffrey Bruce ( 39 ) Jeffrey Ubben ( 26 ) Jerusalem ( 2 ) Jim Chanos ( 20 ) Joel Greenblatt ( 7 ) John Armitage ( 44 ) John Griffin ( 16 ) John Paulson ( 17 ) Joho Capital ( 23 ) Jordan ( 3 ) Joseph Steinberg ( 9 ) Julian Robertson ( 4 ) KWA ( 2 ) Kahn Brothers ( 18 ) Kakkanad ( 4 ) Kanyakumari ( 2 ) Kawai ( 2 ) Ken Fisher ( 10 ) Kids ( 49 ) Kids Yamaha ( 3 ) Kindle ( 2 ) Kodaikanal ( 2 ) Korg ( 2 ) Kraft ( 2 ) Kuala Lumpur ( 2 ) Kynikos ( 20 ) LSAT ( 1 ) Larry Robbins ( 18 ) Las Vegas ( 2 ) Leon Cooperman ( 30 ) Leucadia ( 2 ) Leucadia National ( 13 ) Lone Pine Capital ( 9 ) Lou Simpson ( 15 ) MCAT ( 1 ) MFP Investors ( 37 ) MODUS ( 1 ) MSD Capital ( 22 ) Mahabalipuram ( 2 ) Malaysia ( 3 ) Marathon ( 2 ) Mark McGoldrick ( 10 ) Markel ( 24 ) Mason Hawkins ( 4 ) Melinda Gates ( 35 ) Michael Dell ( 22 ) Michael Price ( 40 ) Middle School Education ( 4 ) Middle School Textbooks ( 3 ) Mini Notebook ( 3 ) Mohnish Pabrai ( 22 ) Mount Kellett ( 10 ) Music ( 6 ) Mutual Funds ( 8 ) Nelson Peltz ( 17 ) Netbook ( 4 ) Notebook ( 3 ) O-Duster ( 1 ) Oahu ( 2 ) Ole Andreas Halvorsen ( 10 ) Omega Advisors ( 29 ) Options ( 4 ) PEG ( 2 ) PLAN Test ( 1 ) PSAT ( 1 ) Pabrai Fund ( 17 ) Paulson & Company ( 7 ) Paulson and Company ( 9 ) Pershing Square ( 19 ) Phil Fisher ( 5 ) Philippe Laffont ( 28 ) Piano ( 9 ) Prem Watsa ( 17 ) Property Taxes ( 2 ) R2I ( 24 ) R2I Finances ( 3 ) R2I Housing ( 5 ) RBS Partners ( 19 ) REIT ( 3 ) Raising Kids ( 41 ) Rat Race ( 15 ) Reducing Expenses ( 2 ) Retirement Portfolio ( 9 ) Reviews ( 81 ) Richard C. Blum ( 12 ) Robert Bruce ( 39 ) Robert Karr ( 23 ) Robotic Vacuum ( 4 ) Roland ( 2 ) Roomba ( 10 ) SQ Advisors ( 15 ) Sears ( 12 ) Services - Reviews ( 33 ) Seth Klarman ( 19 ) Shipping ( 5 ) Shopping ( 3 ) Ski ( 5 ) Sled ( 4 ) Solar Stocks ( 13 ) Soros Fund Management ( 14 ) Southeastern Asset Management ( 4 ) Southwest ( 2 ) Stanley Druckenmiller ( 33 ) Statue of Liberty ( 2 ) Stephen Mandel ( 9 ) Stock Analysis ( 84 ) Stock Investments ( 4 ) Stock Portfolio Updates ( 6 ) TOEFL ( 1 ) TPG-Axon ( 20 ) TaxAct ( 3 ) TaxCut ( 1 ) Teacher's Editions ( 5 ) Technology ( 5 ) Test Prep ( 11 ) Thailand ( 3 ) Thekkady ( 2 ) Third Point ( 10 ) Thomas Gayner ( 44 ) Thyra Zerhusen ( 29 ) Tiger Cub ( 34 ) Tiger Global ( 17 ) Tiger Management ( 13 ) Time Square ( 2 ) Travel ( 278 ) Travel Reviews ( 82 ) Trian Fund Holdings ( 10 ) TurboTax ( 3 ) Tweedy Browne ( 10 ) Vacations ( 28 ) ValueAct ( 11 ) ValueAct Holdings ( 8 ) Vancouver ( 2 ) Video ( 3 ) Viking Global ( 10 ) Wallace Weitz ( 18 ) Warren Buffett ( 32 ) Wayanad ( 4 ) Weitz Investment Management ( 17 ) William Von Mueffling ( 12 ) Wintergreen Advisors ( 15 ) YDP ( 1 ) YPG ( 1 ) Yacktman Asset Management ( 10 ) Yale Endowment ( 17 ) Yale University ( 7 ) Yamaha ( 7 ) air asia ( 2 ) airlines ( 2 ) apartments ( 2 ) barbuda ( 2 ) bay area ( 2 ) best sites ( 9 ) books ( 4 ) british honduras ( 2 ) canada ( 4 ) cancun ( 3 ) carl icahn ( 9 ) casino ( 3 ) coin collecting ( 266 ) collectibles ( 266 ) cook islands ( 2 ) coonoor ( 2 ) credai ( 4 ) dry bulk shipping ( 2 ) eReaders ( 2 ) flat ( 4 ) flats ( 2 ) free ( 17 ) frugal ( 3 ) futures ( 2 ) gambling ( 3 ) garmin ( 2 ) george soros ( 27 ) giveaway ( 15 ) gps ( 5 ) hobby ( 17 ) holiday shopping ( 7 ) home ownership ( 5 ) iRobot ( 5 ) india real estate ( 5 ) invesco ( 17 ) investing strategies ( 3 ) israel ( 5 ) kerala real estate ( 5 ) kochi ( 8 ) laptop ( 5 ) long ( 6 ) long call ( 2 ) long puts ( 3 ) memorabilia ( 266 ) mortgage ( 2 ) mysore ( 2 ) numismatics ( 266 ) offers ( 2 ) online tax ( 4 ) ooty ( 2 ) passive income ( 7 ) pattaya ( 2 ) philately ( 283 ) portfolio ( 4 ) product reviews ( 13 ) reading ( 5 ) real estate ( 6 ) schooling ( 2 ) seeking alpha ( 2 ) short ( 5 ) short calls ( 2 ) short put ( 2 ) short puts ( 2 ) short selling ( 13 ) spin-offs ( 2 ) stamp collecting ( 283 ) stocks ( 3 ) summer ( 2 ) tax ( 7 ) theme park ( 2 ) trip report ( 21 ) value investing ( 25 ) wilbur ross ( 17 )