Shorting against the box- what was DH thinking?

[Anonymous]

Need your help DCUM. Walk me through how bad this is or isn't.

DH took out shorts (1300 shares) in 2020 against the DJIA index, using 1500 shares of DJIA as leverage. Needless to say, the market has not crashed since 2020, quite the opposite. The shorts have an unrealized loss over 300k and gaining at this point.

He says this is "safe" because the one hedges against the other. My thought is--after holy hell, what were you thinking?! I can't believe you actually did this -- is you still lose the DJIA shares + opportunity cost + what else??

[Anonymous]

A "safe" position where one fully hedges the other implies some kind of net zero; i.e., no net position in the market at all, which is nonsense.

So your 1500 shares is fully applied to the 1300 shares short? Is the thinking to ride this out until the margin account is gone completely??

[Anonymous]

Oh no, I am really sorry OP. All I can say is that this is exactly why the general advice for most people is just to invest in a broad market index fund/ETF. It's very easy to start down the path of personalized investing and end up in places like this.

[Anonymous]

Anonymous wrote:A "safe" position where one fully hedges the other implies some kind of net zero; i.e., no net position in the market at all, which is nonsense.

So your 1500 shares is fully applied to the 1300 shares short? Is the thinking to ride this out until the margin account is gone completely??

It's not clear to me how he "shorted" the DJIA. Margin requirements are astronomical when you short sell an individual stock (he's probably holding 1500 shares of the DIA ETF).

He should have just been selling covered calls - pocket the premium and if the current shares appreciate to the strike price, he sells them.

[Anonymous]

Yes correct, it's the DIA ETF. Sorry to be unclear, this is learning curve for me.

I have no idea what he was thinking initially, but he must have thought he could control the risk of unlimited losses against the equal rise of the owned shares. I imagine most people who short don't think they're going to hold the position very long?

In theory, it seems that he could hold the shorts indefinitely (waiting for what would now have to be a significant downward correction), hedged against the owned shares. But how long to wait for that?

Because I know so little about short selling, I'm worried there are more potential losses I don't know about to continuing to hold the shorts until this happens.

[Anonymous]

Margin use is strongly, strongly discouraged for most people. This is why most brokerages accounts have this little box you check when you open them, to indicate whether or not to want margins.

He's going to lose a lot of money. The money he lost, plus all the money he could have made these past few years had he invested in regular tech stocks or ETFs.

He has to get rid of them. The market has a way to go before a major correction, I believe.

[Anonymous]

The strategy has no purpose anymore, it used to be used to avoid taxes but the its closed the loophole. It’s a neutral position and your husbands delta is 0.

[Anonymous]

Anonymous wrote:The strategy has no purpose anymore, it used to be used to avoid taxes but the its closed the loophole. It’s a neutral position and your husbands delta is 0.

NP. Curious to learn. When you say his delta is 0 how does that relate to the shorts?? he took. Will he lose money?

[Anonymous]

Anonymous wrote:

Anonymous wrote:The strategy has no purpose anymore, it used to be used to avoid taxes but the its closed the loophole. It’s a neutral position and your husbands delta is 0.

NP. Curious to learn. When you say his delta is 0 how does that relate to the shorts?? he took. Will he lose money?

Husband had 1500 shares of DJIA, he borrowed another 1300 shares and immediately sold them. His shorted/borrowed shares actually increased in price, so he needs to buy them back at a higher price, which is exact same price of the shares he owns outright. So he took a neutral position in 1300 of his 1500 shares and the fact that the price increased for his owned shares is negated by the fact that price also increased on his borrowed shares, which he needs to cover at some point. See? The strategy makes no sense. It used to be used to avoid taxes, which you can easily find on the internet, but that loophole is closed. Essentially the husband turned his 1500 shares of DJIA into 200 shares, he would have been better off just holding onto those shares and enjoying the appreciation. But the husband thought DJIA was going to decrease and did not seem to realize that this is a useless strategy.

[Anonymous]

OP here. Good explanation and he did say something about doing it for tax purposes.

So if he holds this delta position for years hoping/waiting for a downturn to bring him back to where he shorted, does he lose anything other than having missed the runup on his DJIA shares?

[Anonymous]

He will only miss out on the appreciation of 1300 shares, honestly i don’t think it matters when he decides to cover, either he needs to pay a lot of money that is offset by the gains he has in his 1300 collateral shares or he pays less money because both his shorts and his collateral drop. He is continually in a neutral position no matter what happens, even if DJIA plummets, he’s not going to make any money. And what he’s doing really has no tax advantages.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:The strategy has no purpose anymore, it used to be used to avoid taxes but the its closed the loophole. It’s a neutral position and your husbands delta is 0.

NP. Curious to learn. When you say his delta is 0 how does that relate to the shorts?? he took. Will he lose money?

Husband had 1500 shares of DJIA, he borrowed another 1300 shares and immediately sold them. His shorted/borrowed shares actually increased in price, so he needs to buy them back at a higher price, which is exact same price of the shares he owns outright. So he took a neutral position in 1300 of his 1500 shares and the fact that the price increased for his owned shares is negated by the fact that price also increased on his borrowed shares, which he needs to cover at some point. See? The strategy makes no sense. It used to be used to avoid taxes, which you can easily find on the internet, but that loophole is closed. Essentially the husband turned his 1500 shares of DJIA into 200 shares, he would have been better off just holding onto those shares and enjoying the appreciation. But the husband thought DJIA was going to decrease and did not seem to realize that this is a useless strategy.

The NP here. So, and pardon my being slow on this, Right now the DH has offset gains with losses and is neutral?? He could get out of his position and not have made or lost money?

[Anonymous]

Your DH needs a hobby.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:The strategy has no purpose anymore, it used to be used to avoid taxes but the its closed the loophole. It’s a neutral position and your husbands delta is 0.

NP. Curious to learn. When you say his delta is 0 how does that relate to the shorts?? he took. Will he lose money?

Husband had 1500 shares of DJIA, he borrowed another 1300 shares and immediately sold them. His shorted/borrowed shares actually increased in price, so he needs to buy them back at a higher price, which is exact same price of the shares he owns outright. So he took a neutral position in 1300 of his 1500 shares and the fact that the price increased for his owned shares is negated by the fact that price also increased on his borrowed shares, which he needs to cover at some point. See? The strategy makes no sense. It used to be used to avoid taxes, which you can easily find on the internet, but that loophole is closed. Essentially the husband turned his 1500 shares of DJIA into 200 shares, he would have been better off just holding onto those shares and enjoying the appreciation. But the husband thought DJIA was going to decrease and did not seem to realize that this is a useless strategy.

The NP here. So, and pardon my being slow on this, Right now the DH has offset gains with losses and is neutral?? He could get out of his position and not have made or lost money?

I have 4 bananas. Bananas are worth 1$ each.

I can sell those bananas myself and make $4. This is the basis for the neutral postition.

Or I decide to borrow 4 more bananas from you and sell them for $1. I really don’t own any bananas outright now but on paper I own $4 worth of bananas and have 4$ extra from selling the ones I borrowed from you.

In one future, price of bananas does not change, but I still need to give you back 4 bananas. The 4$ I made is offset by needing to give you all 4 of my bananas. I have had a neutral position where I stay at $4 total. I essentially still just sold my own bananas and got that $4.

In another future, the price of bananas goes up to 2$. My 4 bananas are now worth $8. But I still need to pay you back 4 bananas. Goodbye $8. I have kept a neutral position at my original 4$ (remember I made 4$ by selling your bananas)

In another future banana prices go down to .50 cents. My 4 bananas are now worth 2$ total. I give you those 4 bananas back since I owe them to you. I have still kept a neutral position at my original 4$ (the 4$ I made by selling your bananas).

See, the whole concept is bananas

[Anonymous]

^ very funny, PP! Thanks.