Short Stocks

As with long stocks, the ROI on for a series short stock transactions can be calculated relatively simply if you know:

1. The entry and exit prices paid for the stock, ETF or Mutual Fund¹

2. The dates the trade was entered and exited.

In this example we will use only short trades though, more than likely, a service's monthly results would consist of both short and long trades.

To work out the ROI we first need to know how many shares you would have sold for each trade. We're going to be a bit more aggressive than in our long trade example and work with a bank of $50,000 risking 20% (or $10,000) per trade but only allocating 50% of our margin on each trade. This will give us a buying power of $15,000 per trade, which we can make full use of because all the shares we are buying are priced over $10.²

Using this trading profile, we can calculate the number of shares we would have been able to sell for each recommendation.

Once we know what our exposure to the market is we can then work out how much we either made or lost on each trade. This is done by subtracting the price we paid to buy the shares back from the amount we received when we first sold them.

Knowing this, we can now calculate the total profit or loss per trade by multiplying the P/L per trade from Step 2 with the number of shares per trade from Step 1. This will also give us our total profit or loss for the entire six trades, which is our gross profit/loss.

Unlike our long trade example, we will incur an interest cost on our margin with this series of transactions which will need to be accounted for in our Profit/Loss.

We began to use our margin on the KLAC trade - at that point, we used the last $5,000 of our funds and borrowed the balance of $10,000 from our broker. For the SNDK trade we used only margin funds, as we did for the last trade which was AMLN.

Your broker will charge you interest on your margin, usually at some premium to the broker call rate. This is the rate that banks charge brokers to cover the security positions of their customers, and the premium you pay in addition to this will depend on the size of your trading account. On $50,000, the premium will be about 0.75%. If we use 7% as the broker call rate, then our margin will cost us 7.75%.

This translates into approx. 0.02% a day. Given the varying amounts we were borrowing over the period of the transactions, our interest bill comes to approx. $331.23 (we won't include the transaction steps as they are too complicated to set out here.)

² Shares valued at less than $5.00 do not qualify for margin, and there is often a sliding scale for shares under $10, whereby you may be required to maintain at least $5 of your own money in each transaction.