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I am having a bit of an issue with regards to understanding a shortening position.

If for instance a currency pair, such as the USDRUB which is trading around 70 RUB/USD right now, or 0.01428(=1/70) USD/RUB.

If I were to short the RUB/USD for a total of 100 000 USD, and it ends up later at 35 RUB/USD, that is, it goes from 70 to 35, it would equal a win of 50%, right?

But, if I were to go long on the inverse of the same currency pair, that is USD/RUB, from 0.01428(=1/70) USD/RUB to 0.02856 USD/RUB (=1/35), I would actually make 100%.

The same thing goes for shortening vs going long for instance on the VIX. If I go long from 15 to 60, I will make 400%. If I short from 60 to 15, I will only make 75%.

What am I missing here? My instinct says that there should be no difference.

Finally, are currency pairs any different from going long/short than for instance a stock?

I understand that going short on a currency pair for instance 70 RUB/USD to 35 RUB/USD means essentially, borrow USD, buy RUB. So I would be borrowing 100 000 USD, get 700 000 RUB, then buy bakc dollars at 35 RUB/USD and get 200 000, so I would actually be making 100 %. But 70 to 30 should mean a 50% win only, at least if we think the same way as stocks.

But how/why is shorting a stock any different? Shorting a stock means, borrowing stocks for say 60, sell them, and then buy them back at 15. 45 in profit on the original 60 price, is 75%.

Why is, are currency pairs any different when it comes to shorting vs stocks?

The mechanisms are the same, right?

I am trying to figure out why shorting stocks is not as profitable as going long. I can only come up with the price of 60 for shorting being considerably higher, leading to lower amount of shares to short. While going long from 15 will give you more orginal shares, but I still can't figure out why there is a difference in currency pairs.

Am I missing something in my calculations or thinking here?

EDIT After some thinking and writing this question, I might have come to realize that the difference being that in the USD example, you will essentially be buying "USD stocks" for your earnings, resulting in twice as many "USD stocks", while in the stock example, you are not turning them into stocks when you liquidate, but to USD currency. If I were to turn my 75 000 winnings to stock after shortening, it would lead to 5 times more shares than on 60. 8333 shares, vs 16666, total profit 4 times more than the original shares.

However, the problem is that the new shares are worth less. I guess same thing could in theory be said about the 200 000 USD, which really now have the same value as the 100 000 USD prior, at least in Russia.

I guess that's the difference, and why shorting a stock is only "as profitable" if you later intend to buy shares on that same stock. It would give you 4 times more shares than on 60.

To sum it up:

When you go long on a stock from 15 to 60, your original 100k will become 400k if you sell, but you will have the same amount of stock, 6.67k stocks. That means you have made 0 new stocks but made 300k in USD currency if you were to sell. So your total: 0 stocks, +300k USD, +100k original. If you were no to sell, you would still have 6.67k stocks. If you were to retrieve your original 100k, you would have a profit of 5k in stocks + 100k in USD.

When you short from 60 to 15, your total now is 175k USD. If you were to buy stocks at 15 for 75k, you will get +5k stocks for 75k and have 100k USD left.

So it's the same, however your profits are now expressed differentely. You have the same amount of stocks and USD, however, in the short example, your 5k stocks left are worth a whole lot less than the 5k stocks left from the long position.

Now, if your 5k stocks from the short position + possible reinvested 100k totalling an 11.67k stocks goes to 60, you would actually have 700k. So 400% reinvested into 400% would still only get you a profit of 700%. Ideally, that number should be 1.6kk.

So now I am still a bit puzzled. It still doesn't add up. WTF happened in the end?

  • How well do you know about margin calls? When shorting a stock, one could be forced to buy to cover that may not be the case when one buys stock with their own cash instead of using borrowed resources. – JB King Aug 25 '15 at 16:42
  • @JBKing I know some, but the question is really about something other than what I think you are referring to. I think I managed to answer it though, while writing it down :) – momo Aug 25 '15 at 17:10
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My instinct says that there should be no difference.

Your instincts are right. Your understanding of math is not so much.

You sold $100K at the current price of 7500000RUB, but ended up buying at 3500000, you earned 3500000RUB. That's 100% in USD (50% in RUB).

You bought 7500000RUB for the current price of $100K, but sold later for $200K. You earned $100K (100% in USD), which at that time was equal 3500000RUB. You earned 3500000RUB. That's 50% in RUB.

So, as your instincts were saying - no difference.

The reason percentages are different is because you're coming from different angles. For the first case your currency is RUB, for the second case your currency is USD, and in both cases you earned 100%. If you use the same currency for your calculations, percentages change, but the bottom line - is the same.

  • Thanks for explaining, but can you explain this. If the current oil price is 80 USD/barrel and price drops to 40 USD/barrel and I have shorted that position, how much money will I end up with? I will only make 50%. The same thing with shorting a stock. The difference in currency pairs, and where my instinct kicks in, is what I have come to understand today thinking about it. Everytime you go with the direction of your base currency, you will essentially not make a big enough profit. In the case of the RUB strenghtening, it is not the case because our base currency is USD. – momo Aug 25 '15 at 20:29
  • Take this for intance, USD/EUR is at 1:1. You go long on USD. It goes up to 0.5 USD/EUR. An increase by 100%. But on CFD contracts you will only make 50%, because although you borrowed 1 EUR, sold it, got 1 USD, and now sell it for 2 EUR, return 1 EUR, keep one 1 EUR. Change the 1 EUR, and you get 0.5 USD. Total 1.5 USD. The problem with shorting anything is that most of the time, it essentially means the strenghtening of the currency traded leading to less converted profits to you. When a stock increases, the currency is essentially getting weaker. – momo Aug 25 '15 at 20:32
  • So while what you say is true, I get 100%, it's only because the RUB gets converted back to USD and i get that weighted correction, because my base currency is not RUB but USD. So, I think my understanding of math is quite good. The actually profit is 50% on short position, however, given your went long against your base currency, you will get a weighted correction. This is not the case if I had gone long with the USD (or shorted against the RUB) and got it right. The profit would still be 50%. – momo Aug 25 '15 at 20:37
  • This is always the case when you short a stock, oil, gold or whatever, becaue you are always going in the direction of the currency it is traded with. That is why my instincts say no difference, because essentially, it also means the strengthening of your current holdings ( the USD appreciated and your 50% can actually buy 100% ) but in reality and in trading, you usually want to see your numbers moving up, not have an implicit, or indirect value attributed to your assets. – momo Aug 25 '15 at 20:38

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