EPTTrading/Investing Thread - Page 54
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Emnjay808
United States10665 Posts
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micronesia
United States24753 Posts
On January 28 2021 07:52 Emnjay808 wrote: Can someone explain to me (like I’m five), how short sellers can borrow shares and just pocket the difference when it’s owed back? Seems like a concept that will obv get taken advantage of? If you borrow someone's share and sell it, you owe one share back to the original investor. If the price of the stock goes down, you will presumably buy a share, return it to the original investor, and then pocket the difference. If the price of the stock goes up, you owe a share which is worth more than what you sold for at the beginning of the transaction. Prices going up tends to result in original investors wanting their share back, and you'll have to buy to cover at a loss. What is your concern with it getting taken advantage of? | ||
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Sbrubbles
Brazil5776 Posts
Essentially, you lose your ability to sell your stock for a set ammount of time, and in exchange you get some money | ||
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micronesia
United States24753 Posts
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Emnjay808
United States10665 Posts
@micro: only concern that it wasn’t coming with interest. But that’s not the case. | ||
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micronesia
United States24753 Posts
On January 28 2021 08:01 Emnjay808 wrote: Ah so there is SOME interest involved. But generally short sellers make that deficit many times over anyways. Ok I got it, thx Only if the stock goes down. If it goes up they lose money. If there is a squeeze they lose a lot of money. It may be smarter to buy a put if you expect the price to go down... that way if the price goes up you will lose, at most, your initial investment in the put only. You can lose multiple times what you originally laid out. | ||
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FiWiFaKi
Canada9859 Posts
On January 28 2021 07:52 Emnjay808 wrote: Can someone explain to me (like I’m five), how short sellers can borrow shares and just pocket the difference when it’s owed back? Seems like a concept that will obv get taken advantage of? A stock is at $10, your broker gives it to you, you sell it on the market, it drops 6 months later to $5, you buy it on the market, and give it back to your broker. $5 per share made. Let's say I'm on the other side of the trade, I bought it for $10 and I expect it to go up. By lending you the share (through the broker), I will get paid some amount of interest. For me, lending you the stock isn't very risky, because if I want to do something with the share and I need it back, then the brokerage will give me someone else's, and lend somebody elses' to you. Generally short positions are a small percentage of positions, so there's an excess amount to shorts, so it's unlikely that when I ask for my share I won't be able to get it. The broker takes on this risk, because if they can't find one they'll have to buy it on the market, but the interest they get from loaning stocks outweighs this risk. | ||
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Emnjay808
United States10665 Posts
But in this case all the GME is being bought up so now it causes the prices for short sellers and regular long term holders to go up? | ||
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FiWiFaKi
Canada9859 Posts
On January 28 2021 08:02 micronesia wrote: Only if the stock goes down. If it goes up they lose money. If there is a squeeze they lose a lot of money. It may be smarter to buy a put if you expect the price to go down... that way if the price goes up you will lose, at most, your initial investment in the put only. You can lose multiple times what you originally laid out. Buying puts is an alternative, but they are actually quite different. Look at GME, the cost to buy a 300 put is like 150 right for a month out. So assuming you weren't going to sell it until expiry, you'd need it stock to drop at least 150 dollars to break even. With a put option you have theta decay, and IV to worry about as well. Buying a put option you're not buying a short position, you're buying on the hope of a delta decrease, a Vega increase, and you're purchasing it on a timer, not just on direction. Often people don't want to combine 4 factors into a trade, because your research tells you a stock will go down, but it might not tell you anything else about these other factors. That's why you would choose to short a stock rather than buy an option for it. | ||
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FiWiFaKi
Canada9859 Posts
On January 28 2021 08:07 Emnjay808 wrote: So... if we were to marry up this to how the GME and WSB is going: Basically the short sellers knew GameStop is failing as a business over time. So they buy up before it dips and sell them instantly. Then when it’s owed back it’ll drop in prices by then and they pocket the difference? But in this case all the GME is being bought up so now it causes the prices for short sellers and regular long term holders to go up? GME as a company is very likely doomed, and over the next 5-10 years it should statistically go out of business. So yes, they buy the stock for $4 thinking it'll go to $2 in a year and pocket those $2. The idea behind a short squeeze is that say you have $100k in your bank account so you borrow 100k worth of shares. It will go to $2 and you will pocket $50k. But now say the shares go up 50%, now the broker knows at some point you'll need to pay $150k to buy those shares back, but you only have $100k in your account, so the broker is worried about how they will get paid. So they tell you, you have to return the shares to us right now, or we will keep all the money that's in your account. The only thing you're able to do in this situation is put more money in your account or close your position. You don't want to lock in your losses so you put more money in your account to show the broker you can still afford to buy those shares for $150k. At some point, you will run out of money, and have no other option but to give back the shares you borrowed. This means you have to buy them on the market, which will bring the price up. By raising the price, another guy shorting in the market also ran out of money, so he also has to buy back those shares from the market, raising the price even more, and it spirals out of control. As a small tidbit, you need to have more money in your account than the amount you borrowed. So if you borrowed $100k of shares, you need to have at least $130k in your account, so that if the price goes up a bit, the broker will have enough time to tell you that you have to return the shares or put more money in. This gives them some time to take your $130k and buy the shares at $120k for example if you weren't able to deposit more money. By doing this, the broker doesn't have any risk of losing any of their money (unless the stock moves 100% in a day and they don't have enough time to buy back the shares). The exact percentage you need over your borrowed amount depends on country, market, type of equity, etc. If the short percentage of shares is small, the long market absorbs it. If the fair value of a stock is $10, but a short buyer has to buy shares and raises the price to $11, rational people would sell the stock because it's above it fair value. However, if the people holding the stock know that a lot of people are shorting the stock and will need to start buying it, they can choose to not sell it, because they know the price will keep increasing because many people have to buy it, so they restrict the supply of an inelastic resource. It becomes a game of hot potato, because the long investors know eventually the stock with return to its fair value. So at some point, the price will plummet down, potentially when enough of the short positions are closed because everyone ran out of money, or the amount of money is too high to pass up locking gains on (because the holder knows the stock is overvalued and will drop eventually). | ||
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LegalLord
United States13779 Posts
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FiWiFaKi
Canada9859 Posts
On January 28 2021 08:44 LegalLord wrote: The WSB sub went private. Guess I have to go find an alternative source of stock advice now. Lets get them to all come to tl. I'm sure our OG starcraft brethren would appreciate the ad revenue. | ||
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Emnjay808
United States10665 Posts
On January 28 2021 08:18 FiWiFaKi wrote: GME as a company is very likely doomed, and over the next 5-10 years it should statistically go out of business. So yes, they buy the stock for $4 thinking it'll go to $2 in a year and pocket those $2. The idea behind a short squeeze is that say you have $100k in your bank account so you borrow 100k worth of shares. It will go to $2 and you will pocket $50k. But now say the shares go up 50%, now the broker knows at some point you'll need to pay $150k to buy those shares back, but you only have $100k in your account, so the broker is worried about how they will get paid. So they tell you, you have to return the shares to us right now, or we will keep all the money that's in your account. The only thing you're able to do in this situation is put more money in your account or close your position. You don't want to lock in your losses so you put more money in your account to show the broker you can still afford to buy those shares for $150k. At some point, you will run out of money, and have no other option but to give back the shares you borrowed. This means you have to buy them on the market, which will bring the price up. By raising the price, another guy shorting in the market also ran out of money, so he also has to buy back those shares from the market, raising the price even more, and it spirals out of control. As a small tidbit, you need to have more money in your account than the amount you borrowed. So if you borrowed $100k of shares, you need to have at least $130k in your account, so that if the price goes up a bit, the broker will have enough time to tell you that you have to return the shares or put more money in. This gives them some time to take your $130k and buy the shares at $120k for example if you weren't able to deposit more money. By doing this, the broker doesn't have any risk of losing any of their money (unless the stock moves 100% in a day and they don't have enough time to buy back the shares). The exact percentage you need over your borrowed amount depends on country, market, type of equity, etc. If the short percentage of shares is small, the long market absorbs it. If the fair value of a stock is $10, but a short buyer has to buy shares and raises the price to $11, rational people would sell the stock because it's above it fair value. However, if the people holding the stock know that a lot of people are shorting the stock and will need to start buying it, they can choose to not sell it, because they know the price will keep increasing because many people have to buy it, so they restrict the supply of an inelastic resource. It becomes a game of hot potato, because the long investors know eventually the stock with return to its fair value. So at some point, the price will plummet down, potentially when enough of the short positions are closed because everyone ran out of money, or the amount of money is too high to pass up locking gains on (because the holder knows the stock is overvalued and will drop eventually). Ty for distilling this info. I’m learning a lot. | ||
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FiWiFaKi
Canada9859 Posts
Lets see what happens for here. | ||
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micronesia
United States24753 Posts
On January 28 2021 09:01 FiWiFaKi wrote: Lets sell what happens for here. Quite the Freudian slip. | ||
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FiWiFaKi
Canada9859 Posts
Ahaha opps. Panic is going to be big, no doubt. Let's see what happens here, I want to say it's going to be an overreaction, but nobody can accurately predict what's going to happen here. | ||
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KwarK
United States43505 Posts
On January 28 2021 09:05 FiWiFaKi wrote: Ahaha opps. Panic is going to be big, no doubt. Let's see what happens here, I want to say it's going to be an overreaction, but nobody can accurately predict what's going to happen here. I bought a pair of 1/29/21 150p contracts earlier today which may actually print. | ||
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Sermokala
United States14081 Posts
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iPlaY.NettleS
Australia4379 Posts
On January 28 2021 08:44 LegalLord wrote: The WSB sub went private. Guess I have to go find an alternative source of stock advice now. Additionally discord has banned the wallstreetbets discord server. https://www.ign.com/articles/reddit-is-down-during-the-ongoing-gamestop-stock-situation | ||
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Emnjay808
United States10665 Posts
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