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?