Suppose I have 2 trading strategies that independently comes to a conclusion, that in a market day, I am supposed to Buy X shares of Stock A and Sell Y Shares of the same stock A. Now, this need to be executed in the market. I can either do: (WLOG Assume Y>X)

  1. Buy X shares of Stock A and sell Y shares of Stock A (or)
  2. Sell (Y-X) shares of Stock A.

Both will get me to the desired position by the end of the market day. What are the advantages of doing (1) over (2) or vice versa.

Some points I could think of:

  • Transaction cost of (2) will be less than (1)
  • If I know how the Stock A is going to behave today(i.e increase/decrease), I can use it to buy low and sell high. But this comes with an inherent risk and is thus not preferred.

Apart from these, can you please suggest some more reasons.

  • 1
    watch the wash sales rules. – mhoran_psprep Feb 27 '18 at 11:05
  • The wash sale rule doesn't come into play until a substantially similar 3rd transaction occurs within 30 days (before and after) of booking a loss. It's meaningless unless it's an EOY carryover issue. – Bob Baerker Feb 27 '18 at 18:22

Yes, + X - Y is the same as - ( Y - X ). It's basic math.

The only reason to execute such trades would be at different time/price points during the day otherwise you'd just execute the net number of shares.

Transaction costs for multiple transactions are greater if you trade at a fixed fee per trade broker. They are the same if you trade at a fee per share broker. For example, two trades of 400 shares each at $4.95 per trade costs you $9.90 whereas at a broker that charges a commission of $1 per 200 shares, it's a cost of $4 whether you do it in 1, 2, 3 or 4 trades in multiples of 200.

If Y is > X then in order to have a negative share position, you must be able to borrow the shares in order to short.

No matter what the order of execution, you will have "inherent risk" since there will be an open position. Executing the smaller share position first reduces the risk.

Let me know what grade we get :->)

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Logically, the two are equivalent. Whether they are practically equivalent depends on the rules of the exchange you're using. You've already identified the main issue - Y might be less than X. (Edit: The assumption was edited to include Y>X so the short answer is now just "YES". Leaving the rest of my answer here though.)

If your independent strategies determine that you should Buy 20 shares of Stock A and sell 10 shares of Stock A then you cannot typically replace that logic with Sell Negative 10 shares. But if your second point just meant to convert to the net Buy or Sell position, then yes it would be equivalent to Buy 10 shares.

In most cases, the fewer transactions you can execute, the less you have to pay in commissions. So it would be helpful to only execute the net Buy or Sell position after combining the two strategies. There's just no guarantee that it will always mean Sell.

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  • Sell Negative 10 shares is the equivalent of buying 10 shares and then selling 20 shares OR shorting 20 shares and then buying 10 shares to cover. – Bob Baerker Feb 27 '18 at 9:56

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