What is a "short game" and why is it dangerous?
Miscellaneous / / October 19, 2021
It is unlikely that it will be possible to repeat the success of the film of the same name.
What is a "short game"
Short, short, short, short, and short are terms that describe the same trading strategy. Its essence is a bet on the fall in the price of an asset that the investor does not own. In the world of finance, you can make money not only from growth, but also from lower prices.
What are the "games for a fall"
There are three main methods: trading short on stock market, buying and selling contracts for urgent and over-the-counter transactions.
1. Trade without coverage
This is the most common and easy-to-understand method: sell at a higher price, buy at a lower price, and make money on the difference. This is done with stocks or bonds of companies that are traded on stock exchanges.
But the fact is that the exchange does not allow selling what the trader does not own. Therefore, one cannot do without broker: he kind of lends securities, and then the investor needs to buy them out and return them to the financial institution.
Let's say a trader took 400 shares of Pervaya from a broker and sold them at 4,500 rubles apiece. A couple of days later, the company's capitalization fell, the investor bought the shares at 3200 rubles and returned them to the broker. The person exited this transaction with a profit of 1,300 rubles per share. And I earned even more:
(400 × 4500) - (400 × 3200) = 1,800,000 - 1,280,000 = 520,000 rubles
This is a speculative profit, in reality it will be less: it is unprofitable for a broker to borrow assets on parole. Investor will pay commission for the purchase and sale of shares, and the broker will also require a percentage for the use of assets.
(400 × 4500 - 1.5%) - (400 × 3200 - 1.5%) = 1,773,000 - 1,260,800 = 512,200 rubles
It turned out almost eight thousand rubles less, although the amount is still significant. But the longer the trader uses the broker's assets, the more he will pay for it. Therefore, the position is called "short" - it is rarely opened for a long time.
If the shares are borrowed and returned within a day, then the broker will not even take money for a loan. But if the loan is moved the next day, then the interest will begin to drip. Therefore, assets are short for a maximum of a couple of months - and even if the deal promises a huge profit.
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There are also exceptions, but rarely. For example, investor Michael Burry began shorting the real estate market in 2005 and continued until the onset of the mortgage crisis in 2007. If the story sounds familiar, then we are talking about one of the protagonists of the movie "Selling Short", played by Christian Bale.
2. Derivatives market trading
You can also play for a fall on the derivatives market. This is a segment of the stock exchange, where contracts are bought and sold with specific terms. Of these, for short traders are ideal futures and put options.
Let's say the trader still believes that the shares of the company "First" will fall within a week. He goes to the derivatives market and sells futures there - something like a purchase and sale agreement, but deferred. The contract says: the buyer agrees to pay 3200 rubles for the shares of the company "Pervaya" in two days.
At the same time, in reality, no one trades stocks. The trader and the buyer of the futures simply agreed that someone alone will guess the price, and the loser will pay him. In our case, the trader made a profit.
If the investor is not too confident in his forecasts, then there is a put option for him - a contract that gives the owner the right to sell the asset at a specified price. Futures is a tough rate for the future, and an option works softer: if the share price has risen, then you can simply not use the option and write it off as a loss. Such contracts are inexpensive.
Trading on the derivatives market is the lot of professionals and is even more complicated than we have described. But at the same time, it has advantages over the stock market:
- no need to pay interest on the loan because futures and put options are not borrowed;
- lower commission;
- contracts are cheaper than underlying assets: for example, if the “First” share costs 3200 rubles, then futures can cost 100-200;
- you can short intangible assets like stock exchange indices or key rates central banks.
3. OTC transactions
Sometimes traders lack the flexibility of standard assets in the stock or derivatives markets. Therefore, professionals are looking for exotic options for betting on the OTC - this is something like a bulletin board for financial transactions without clear regulation. For example, in Russia, there are such sites Moscow and St. Petersburg exchanges.
Here you can find a way to short almost any asset, but the main thing is to really use the “short game” both for earning and for protecting capital.
A good example of this is credit default swaps, CDS, derivatives that help protect against credit risk. Let's say an investor has doubts about the sustainability of a large company, whose bonds he bought. Purchasing swaps is a way to insure money, for which you need to pay an insurance premium from time to time. As OSAGO, only for financial assets.
But traders can use the same tool to bet on the fall of the company: the same "short", but on a larger scale, with a forecast of bankruptcy.
The problem is that if there are many bankruptcies, as during the 2007-2008 crisis, then the guarantors will not be able to pay off all of them.
The "domino effect" will begin when one business collapses and pulls a whole line behind it. And traders completely lose their capital.
Why is the "short game" dangerous?
Trading short by any method is a bet on an unknown future, so this is by default a risky way to make money.
Unlimited damages
If a trader is short trading, he may not only lose all his capital, but also remain in debt.
Let's say a person borrowed shares of the Second Company for 1000 rubles. Accordingly, he received a thousand for the sale. But the price of securities did not fall, but continued to grow. A week later, the same shares were already worth 3000 rubles. Here the trader has two ways left: to endure, not to twitch and pay interest to the broker or buy back assets from loss. But in this case, an amount several times more than the initial capital would have to be recorded in losses.
3000 - 1000 + 0.2% to the broker for each day
It turns out that just one unsuccessful week brought more than 200% loss. But a trader can believe to the last that he is right and the company will collapse, and continue to pay the broker, expecting a collapse that will not happen.
Margin call
Perhaps the trader will not even have time to face such a loss. Even earlier, the broker will issue a margin call - a demand to deposit more money, because the investor's debt has become too large.
It can happen something like this. The trader wants to short all the same 400 shares of the Pervaya company. The broker calculates the minimum margin, which, for example, will be equal to 324,000 rubles. And if the cost portfolio falls below this mark, then the broker will come with a margin call.
The problem is that the trader may not have enough money for new collateral. Then the broker will start selling other assets from his portfolio, and in the end he will forcibly close the "short position" too - which will be absolutely legalFederal Law of April 22, 1996 No. No. 39-FZ "On the Securities Market" . So there is a risk not only of losing money on one deal, but also of losing the entire investment portfolio.
Short squeeze
Sometimes short traders predict the future correctly and open their short positions in time. But they can be substituted by other investors who are interested in the growth of quotations.
For example, in early 2021, this happened with the GameStop network of American video game stores. The business stopped developing and gradually faded, the share price gradually fell, and the company was one of the most blinkered in the stock market.
But a group of nonprofessional investors WallStreetBets coordinatedStonks Are Bonkers, and Other Lessons From the Reddit Rebellion / Bloomberg Businesweek and set up a short squeeze: a lot of people started buying up GameStop shares, and the price immediately began to rise, from $ 2.57 to over $ 500 apiece. Traders found themselves in a trap: leaving positions and urgently replenishing brokerage accounts or returning stocks with huge losses.
Very high speed
Professional traders can make money on shorts because they have information and analytical skills. For example, experts know where to get data on companies and assets, and can quickly estimate how the market will react to the news.
Thanks to their knowledge and skills, experienced participants are able to stay ahead of the market, and sometimes seconds are counted. For example, the author of the article decided to play "shorts" on March 10, 2020. On this day, Russian stock exchanges openedOil Prices Nose-Dive as OPEC and Russia Fail to Reach a Deal / The New York Times after the news of the rupture of the OPEC + deal, and the shares of oil companies collapsed.
At the start of trading, in the first 20-30 seconds, there was a chance to push the order and sell the share at more or less normal value. But at about 10:00:50 there was no more sense - prices collapsed, and a slower trader would have been left with losses for three weeks.
Should private investors play short
To use "shorts" or not - depends primarily on the investor. This is not an absolute evil, but a complex and risky tool that requires constant analysis and attention.
Everything is determined investment strategy, access to information and knowledge about financial markets. Thus, a private investor can insure risks in the derivatives or over-the-counter market, as well as speculate with a small part of the portfolio. But it will be difficult to understand a CDS contract several hundred pages long and with the most complex calculations at its base.Y. Wen, J. Kinsella. Credit Default Swap — Pricing Theory, Real Data Analysis and Classroom Applications Using Bloomberg Terminal.
Short trading is more suitable for traders. They work in financial markets, spend hours studying data and can handle complex instruments.
If we are talking about the over-the-counter market, then, in principle, there are no non-professionals on it, because serious capital and special legal statuses like “qualified investor"Or" professional participant of the securities market ".
What is worth remembering
- “Play for a fall” is a trading strategy, the essence of which is betting on a fall in the price of any asset. From stocks and bonds to stock indices and grain contracts.
- Assets are short-circuited mainly by professional traders - a novice investor is likely to get confused and lose some of the money.
- The main risk of short trading is that losses are not limited and you can really stay in debt. A short trader can lose both 200 and 300% of the investment.
- Selling a Bottom Line is not an absolute evil, but simply a complex tool that needs to be applied to the spot. Then he will help you both earn and protect your capital. But this is a tool for experienced market participants.
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