Let's say I hold 5 shares of AAPL. I'm guessing that the stock price will fall with respect to the open price. So I sell at open and then it falls 10%. Then I buy it back which should give me the difference X as profit. Then I sell it again at the price I bought it after the short, which means I have zero stocks of AAPL, profit from short + profit from holding difference My question is, am I right to assume that I'll be having 0 net shares and profit from 2 sources, i.e. profit made from the holding period and the short?

  • It's not a clearly phrased question. If you hold 5 shares of stock and then sell at the open, the sale closes the existing position. If by holding 5 shares of AAPL you are referring to opening a short position then the 2nd part of your question makes no sense. If you state clearly what the transactions are, an answer could be offered. Thx. – Bob Baerker Feb 6 '19 at 14:21

Yes, in the end, you would have 0 net shares and some profit. But you are never "short". A short position means you have borrowed shares and have a net negative number of shares. All you did was "time the market", buying low and selling high.

Timing the market is not a viable long-term strategy. No one can predict the future with any certainty. You can get lucky from time to time, but in the end the times it goes against you will eat up most (or all) of your gains. Market gains only happen over longer periods of time, in the short-term large losses are more common than large gains.

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  • Yes, timing the market is not a viable long-term strategy but there are times when you can make timely decisions. A good example was in 2008 when over the course of 15 months, the market lost more than 1/2 its value. 2000 was similar. In such cases, you don't have to predict anything. You only have to react to what's going on. Nice market gains occur if you're on the right side of such a move. – Bob Baerker Feb 6 '19 at 15:05
  • The reason I asked this question is, when I sell stock in the open, I don't have to buy it later. If I'm content with the profit I made by the sale, this could be like a bonus free money. If the stock goes down buy it, else, enjoy the morning profits – Rishi Swethan Feb 6 '19 at 15:24
  • @RishiSwethan Precisely. If you instead open an offsetting short position, you have no exposure but have two offsetting positions that you have to deal with at some point. Might as well just close your position and but it again later if you want to. – D Stanley Feb 6 '19 at 16:13

No, you didn't make any money from the drop. You started off with +5 AAPL. Selling the 5 shares prior to the drop left you with no position. You never had a short position at any point in time.

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So I sell at open and then it falls 10%. Then I buy it back which should give me the difference X as profit.

This is categorically not the definition of profit. Avoided paper loss is not the same as profit.

When you short a security you are selling something you don't own.

Example 1, Your description:

  1. I own five shares of Apple valued at $150

    • My account has assets worth $750
  2. I sell my five shares of Apple for $150

    • My account now has cash worth $750
  3. The value of Apple falls from $150 to $120

  4. I buy back the five shares of Apple for $120

    • My account now has five shares of Apple and $150 of cash for total assets of $750.

Example 2, Mechanics of a short position (ignoring borrowing costs):

  1. I own zero shares of Apple, my account is empty

  2. I borrow your 5 shares of Apple

  3. I sell your 5 shares of Apple for $150

    • My account balance goes from $0 to $750 of cash
  4. The value of Apple falls from $150 to $120

  5. I buy 5 shares of Apple for $120

    • My account balance goes from $750 to $150
  6. I give you back the five shares I borrowed

  7. I own zero shares of Apple again, but still have $150 of cash

In example 1 you end up with the same five shares of Apple and a new $150 of cash, but all you did was avoid a paper value loss of $150. Your account balance never fell from the $750 where it started, you just didn't participate in the value decline from $750 to $600. Whether your sale of the shares triggers a gain or a loss would depend on the price of the shares when you bought them. There are rules related to selling and re-buying called "wash-sale" rules, but as far as basics go you are not describing a short position or profit, the $150 of cash in this example is explicitly not profit.

In example 2, the trader started with zero and ended with $150 of cash, which is a profit of $150.

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