Shorting against the box- what was DH thinking?

[Anonymous]

Anonymous wrote:

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

The "NP" here. Thank you! I am going to print this out.

[Anonymous]

Is this his entire portfolio, or do you have a large portfolio and this is just one position? If the later, it's never fun to have a losing trade, but it may just be one trade that didn't work out. If the former, and you have effectively made 0 returns in 4 years by mistakenly hedging, that is a different story.

[Anonymous]

Tell him to get out over the next year. Ugh

[Anonymous]

Did he miss the day in 5th grade where you read about all the people trading on margin in the 20’s?

[Anonymous]

Anonymous wrote:Did he miss the day in 5th grade where you read about all the people trading on margin in the 20’s?

That's not the takeaway from OP's story.

[Anonymous]

Anonymous wrote:

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

Wonderful, lucid explanation! (Sadly I keep getting distracted thinking about how much the inherent value of each banana deteriorates over time via enzymatic browning.)

[Anonymous]

As people have already mentioned, the strategy is essentially like keeping the money for the 1300 shares under the bed. At face value, there is no upside and no downside as you are just betting against yourself.

The one upside I can think of, but do not know if it is possible, is if he is somehow playing marital assets against non-marital assets such that his assets are going up while your marital assets are going down.

[Anonymous]

This looks like a failed Covid trade, he was long 1500 DIA value was $362K in early 2020. He wanted to protect that at little cost, put option protection cost was going up due to the market slide in early 2020. So he borrowed and sold 1300sh to be neutral and protect his gains at that point. Hence short the box.

For whatever reason(s), he did not take the trade off. That was a strategic error, it is a trade, it went against you, have to close it out. Typically people short positions for weeks or maybe months, but not years. Sometimes when you short positions the brokerage will charge you an interest rate to borrow the shares, that is a cost but in your case with the DIA maybe its nil. Plus short shares must pay the dividend so that is addl cost.

I'm assuming this is part of a larger portfolio. He needs to close this short position out with shares of DIA or $$$, or a combination of both. So now he needs to look at the tax consequences of whatever method he decides upon.

[Anonymous]

OP here. I'm so appreciative of these insights, they do make sense with some of the things he's said, eg a Covid trade.

I'm short for time now, but this is part of a larger $3M portfolio, arguably not that large for doing these kinds of trades.

Also for simplicity, I asked about the DIA shares because he has a clear 1:1 position. But if we're looking at there overall picture, he does have a second short position, a spyder, that from what I can see doesn't have a direct hedge. Though it's in an account with other equities, so maybe he's trying to mirror the mix? I can look more in detail tonight.

[Anonymous]

Anonymous wrote: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??

LOL, is this r/WallStreetBets?

[Anonymous]

Okay here's a better breakdown.

~$3M portfolio overall
with a $1.1 margin account. This includes:
Long: 1,502 DIA ETF current value: 586,148
Short: 1,310 DIA ETF current value: -510991.7

Long: 18,720 shares of 10 individual stocks in the SPDR S&P 500 ETF current value: 879,135
Short: 1,550 shares SPDR S&P 500 ETF current value: -798172.5

So if he closes the shorts, is the account effectively brought to $156,119?

[Anonymous]

In the DIA trade he is long $86k so if the Dow is up 10% or down 10% he has $8600 of exposure. This seems unnecessarily complex if this is the exposure he wants.

The long 10 stocks short spy may be a logical trade. It implies he has a plan and assumes the 10 will outpace the overall market to the upside.

Overall sounds like you two need to get on the same page with regard to your financial planning.

[Anonymous]

Anonymous wrote:In the DIA trade he is long $86k so if the Dow is up 10% or down 10% he has $8600 of exposure. This seems unnecessarily complex if this is the exposure he wants.

The long 10 stocks short spy may be a logical trade. It implies he has a plan and assumes the 10 will outpace the overall market to the upside.

Overall sounds like you two need to get on the same page with regard to your financial planning.

sorry, $76k not $86k

[Anonymous]

Anonymous wrote:

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

Thank you PP, you put a lot of thought into this and that is why DCUM Money is great!

[Anonymous]

Yes, if he closes out the shorts with the long positions his acct value approx $156k. Again this is now a tax issue, you have potential LT capital gains w LT capital losses. Maybe now he wants to keep the long positions, so if available he could use cash to closed out the short positions, or maybe a mix of long ETF w cash.

This is not the way to build wealth obviously esp with this current market environment. It was a Covid trade that went south, he needs to transition out of these short positions.