Reply to Shorting against the box- what was DH thinking?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=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.[/quote]

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

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.[/quote]

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?[/quote]

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[/quote]

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

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