I may not open a Short Trade in my life!This would be shocking news for most of my followers since we made decent money doing that in 2021-2022, but let me explain the mathematics behind it.
Before diving into the mathematics, let me tell you I will buy a Naked Put if there is a high conviction for an asset's future lower price.
Let me explain the risk-reward profiles for long and short positions:
Long Position:
When you buy an asset (go long), you purchase it hoping its value will increase
Maximum loss: Limited to your initial investment (if asset goes to $0)
For example, if you buy a stock at $100, your maximum loss is $100 per share
Maximum gain: Theoretically unlimited, as the asset's price can keep rising
If the stock goes to $200, $300, $1000+, your profit keeps growing
Short Position:
When you short an asset, you borrow and sell it, hoping to repurchase it cheaper later
Maximum gain: Limited to your initial sale price (if the asset goes to $0)
For example, if you short a stock at $100, your maximum gain is $100 per share
Maximum loss: Theoretically unlimited, as the asset's price can keep rising
If the stock rises to $200, you lose $100; at $300, you lose $200, and so on
The asymmetric risk-reward comes from math:
Long positions: Asset can't go below $0, but has no upper limit
Short positions: Can only profit until $0, but losses grow with each price increase
Shorting comes with several additional costs that make it more expensive than going long:
Borrowing Costs (Short Interest)
You must pay interest to borrow the shares you're shorting
Rates can range from very low (0.25%) to very high (50%+) annually for hard-to-borrow stocks
This cost reduces your profits or increases losses over time
Margin Requirements
Need to maintain a margin account with collateral
Higher margin requirements for short positions (typically 150% of position value)
Risk of margin calls if the position moves against you
Dividend Payments
Short sellers must pay any dividends to the lender of the shares
This is an additional cost that long position holders don't face
Can significantly impact profitability for high-dividend stocks
Stock Recall Risk
The lender can recall their shares at any time
This may force you to close your position at unfavorable prices
It is particularly risky during short squeezes
These costs mean that even if your directional view is correct, you might still lose money on a short position due to holding costs.
Asymmetrical Moves
"Markets take the stairs up but the elevator down"
The opposite happens more often!
During bubble collapses and market crashes:
Downside moves can be gradual as denial, hope, and orderly selling create a stepped decline
Some investors average down, providing temporary support
Circuit breakers and trading halts can slow dramatic falls
During upside rallies, especially short squeezes:
Price can explode upward very rapidly as shorts rush to cover
Fear of Missing Out (FOMO) creates buying panic
Margin calls force immediate buying
Limited available shares can cause bidding wars
Historical Examples:
GameStop (GME) in 2021: Rose from ~$20 to $483 in just a few weeks
Volkswagen in 2008: Briefly became the world's most valuable company during a squeeze
Tesla's multiple rallies in 2020: Several sharp upward moves that hurt short sellers
This faster upward movement makes short positions particularly dangerous because:
Less time to react to adverse moves
Higher likelihood of getting caught in a short squeeze
Margin calls can come suddenly with little time to add funds.
A most recent example: is RGTI my best Idea on the platform got 16x in less than 100 days!
