It's so noob and I'm too afraid to ask

Discussion in 'Ask any question!' started by cashman, Mar 31, 2021.

  1. cashman

    cashman New Member

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    Hi guys. So I'm not that much of a noob when it comes to the general stock market but i'm planning to short some stocks and that opens up to a whole new world for me, which leads to a ton of noob questions. I hope someone could help shine some light. Very much appreciate it!

    I understand to short sell stocks i got to use a margin account, and I applied one in webull. Here comes the question, say I have $10000 in my account, and I want to short a stock (day trade only, not holding overnight), the stock has a maintenance requirement of 200%, does that mean that if I short $2000 worth of stock, I gotta have at least $2000x200% = $4000 of cash sitting in my account untouched?

    I did contact Webull with this exact question, they said the $2000 I shorted the stock for does not count as use of margin.

    I'm super confused. Shorting a stock meaning borrowing stock from the broker, I thought it should count as use of margin, I really need clarification on this.

    If the above scenario doesn't count as margin, does that mean that if I short a stock using leverage would count as using margin?

    Really appreciate it guys!
    Cash
     
  2. spindr0

    spindr0 Active Member

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    Reg T margin for shorting is 150% of the value of the short sale at the time of sale. The proceeds from the short sale can be used to meet the requirement so effectively, the margin requirement is 50%.

    Brokers can require a higher margin requirement which is the case here as webull is requiring 200% (full margin). That means that if you short $2000 worth of stock, it will segregate $2,000 of your money for your margin requirement (the $2k received from the short is applied to the $4k requirement).

    Note that by definition, the maintenance requirement is something different from initial margin. However, when margin is 100%, their dollar amounts are the same.

    > ... i'm planning to short some stocks and that opens up to a whole new world for me,

    Some info:

    You will pay a borrow cost to the lender. The harder the shares are to borrow, the greater the borrow cost. I have seen the borrow rates of several hundred percent a year. Not a good thing for longer term shorts.

    If you are short the stock on the ex-dividend date, you will pay the dividend to the borrower. In and of itself that's not terrible because the stock exchanges reduce share price by the amount of the dividend on the ex-dividend date (it's a wash) but in reality, stocks with decent dividends have a tendency to rally into the ex-div date as well as after it.

    If it's a hard to borrow stock and an owner wants to sell his position and no additional shares are available to borrow, you may receive a Buy In notice and you will be forced to cover your short position. If you do not cover yourself, your broker will do so in the after market when B/A spreads are wider. Not good. In addition, if there are enough notices received, short covering will drive up price and that will cost you something.

    Avoid shorting until you have market experience and you know how to practice disciplined risk management. Don't get me wrong. I short all of the time and I have had some years where I paid thousands of dollars in borrow fees. Noobs should be very leery about shorting until they get their trading sh*t together.
     
    #2 spindr0, Mar 31, 2021
    Last edited: Mar 31, 2021
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  3. Rustic1

    Rustic1 Well-Known Member

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    A LOT of accounts have been blow up getting on the wrong side.
     
  4. TomB16

    TomB16 Well-Known Member

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    That's why God invented the third mortgage.

    The second mortgage is for trading. Third mortgage is for filling in the divot left by trading.
     
    #4 TomB16, Mar 31, 2021
    Last edited: Mar 31, 2021
  5. Rustic1

    Rustic1 Well-Known Member

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    I took a 30 year fixed rate at 5%, got a first time homebuyers credit of $ 7,500, paid it on the principal and instead of buying play pretties and nonsense, paid every nickel I could live without on the monthly note. That was in 2009,loan was 85,000. Note was paid off YEARS ago. Agents constantly contact with offers North of 250,000.
    Don't intend on selling and absolutely will not borrow to do foolish things. :cool2:

    Back to the original posters question.

    In my opinion, shorting has more risk/reward ratio than I am willing to handle. If it blows up you can get wiped out quicker than you realize, the gains are minimal.

    PUTS are a better play " for me" less capital used for more leverage.

    Trading is not easy and not for everyone. Some of the longtime investors talk about it like its Voo Doo, simply because they don't know how and know a few that lost, plus the endless articles that advise against it. Most dont succeed, however the ones that do have well organized plans that achieve great results.

    SPINDR.0 is one of the investors that can remain profitable in any market condition by employing options and other methods.

    Some will simply fall in love with a stock and ride it down 50% with no protection, they fail to realize that 50% drop will take a 100% increase just to break even.
     
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  6. Syynik

    Syynik Well-Known Member

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    I agree-if you're new to the game, don't bother with shorts. Puts, yeah, try out your hypotheses on Puts, but with a fraction of your account in case things go south.
     
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  7. spindr0

    spindr0 Active Member

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    Thanks for the kind words Rustic1. I've used options for nearly 40 years and my final resting place is playing the middle, leaving the tails to others (the really big wins and the really big losses). Last March's drop didn't faze me because of that.

    Here's an example something from last spring/summer that appeals to me.

    I **bought** WYNN at $76 and added a few option positions expiring in 58 days. Per 100 shares, from $76 down to $55, I would make $1.55 so a small gain if the stock dropped up to 28%. Below $55 I would lose $ for $ like any long owner of the stock if I did nothing. However, before it got to $55 I would defend by adjusting, offsetting a chunk of the losses while lowering cost basis.

    To the upside, the potential gain was $4.05 or 5.33% which annualizes to 34% a year. This isn't a get rich scheme, just a way to grind out possible gains with less risk.

    And FWIW, I had several 1,000 share positions in large caps that lost over half their value and due to active risk management, the net losses were maybe 7-8% when the market tanked 35% last March.

    I'm no rocket scientist. I picked this strategy up on another BB several years back and it appealed to me. Reduced risk with the potential for income and some modest growth.
     
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  8. Rustic1

    Rustic1 Well-Known Member

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    ^^^^^ Some of these fellers could learn from your experience, insurance.
    Like the American Express card, dont leave home without it. :cool2:
     
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  9. Bridget Mallory

    Bridget Mallory Active Member

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    I agree
     

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