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millionby24 (< 20)

Top Caps Members... DISPROVE THIS THEORY

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June 17, 2009 – Comments (30)


Here's a hypothetical situation

Lets pretend these are my funds in my account.
Broker Account #1

I have $500,000 USD
Broker Account #2

I also have $500,000 USD

I pick a stock that has VERY high daily flucuations, for arguement sake lets pick POT:US Potash Corp of Saskatchewan Inc

and let's take todays prices into account.

High :101
Low:95

let's just say I thought $99 was a fair Value to get in on this stock because I think it will go up, but the other side of me is worried it would fall more, I then purchase 500 stocks in my Broker Account #1, and on Broker Account #2 I SHORT 500 stocks.



The Market Closes - POT closes at $95

Broker account #1 - I Lose $2 Buying the stock for a total of = -1,000
Broker Account #2 - I make 4$ Shorting the stock for a total of = +2,000

So now I cover all my shorts for a 2,000$ gain, but the other account has a loss of 1,000 with the stock at 95$, but I can now Just go in and buy MORE of the stock at a lower value, and when the stock eventually goes back to $99... I make all the money I lost back, +more..

Is this the trick to never lose, and always WIN in the market???


Can someone disprove this theory?
!

30 Comments – Post Your Own

#1) On June 17, 2009 at 8:59 PM, EggplantWizard (99.48) wrote:

This would work every time *if* shares were always available to short for the security in question and *if* you have correctly identified "fair value" (the middle of a "trading range), which is a very difficult, if not impossible thing to do.

 

You're also presuming that the cost of borrowing shares is zero, which is virtually never the case.

If you try this, I expect you to experience a string of modest successes followed by a catastrophic failure

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#2) On June 17, 2009 at 9:13 PM, millionby24 (< 20) wrote:

#1

Shorting Shares is never a problem for a real trader, thats why I put Acc #1, and #2.


You don't have to find the "MIDDLE" of the trading range if u did more calculations. The price of a stock ALWAYS goes back to where it has before once in a week, maybe 2 at most. So the "losing side" of the trade will always come out EVEN or BETTER. Especially in this market


I tried it the past week and actually made $5,600






Anyone??


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#3) On June 17, 2009 at 9:16 PM, ChrisGraley (29.73) wrote:

What Eggplant Said...

Your better off playing a volatile stock like that with an option spread, but you still have to peg the fair value.

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#4) On June 17, 2009 at 9:17 PM, ChannelDunlap (< 20) wrote:

I'm confused how going long at 99 and closing at 95 is only a $2 loss.  What am I missing?

But if your numbers are right (somehow), then it sounds good.

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#5) On June 17, 2009 at 9:18 PM, millionby24 (< 20) wrote:

#3

What if the person doesn't know how to play options? or they just don't want to deal with what a stock price will be a month or 2 away???


The illusion of 'fair value' intrigues me.


can you answer me? What is fair value? after all it's just pieces of paper isn't it?

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#6) On June 17, 2009 at 9:21 PM, millionby24 (< 20) wrote:

#4


Wow the numbers are all wrong, but does anyone know what I mean??

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#7) On June 17, 2009 at 9:25 PM, millionby24 (< 20) wrote:

Here it is EDITED


I buy at 99$

500 shares Short/Long



High :101
Low:95



The Market Closes - POT closes at $95

Broker account #1 - I Make$2 Buying the stock for a total of = +1,000
Broker Account #2 - I Lose 4$ Shorting the stock for a total of = -2,000

So now I cover all my shorts for a 1,000$ gain, but the other account has a loss of 2,000 with the stock at 95$, but I can now Just go in and buy MORE of the stock at a lower value, and when the stock eventually goes back to $99++... I make all the money I lost back, +more..

Is this the trick to never lose, and always WIN in the market???


Can someone disprove this theory?
!

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#8) On June 17, 2009 at 9:26 PM, ChannelDunlap (< 20) wrote:

Well if the numbers are wrong and we suppose it's a $4 loss vs a $4 gain then it sounds to me like you've found a great way to lose trading fees...  In which case, no, I have no idea what you mean.

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#9) On June 17, 2009 at 9:26 PM, tonylogan1 (28.14) wrote:

Your math is wrong (or I am crazy)...

If you bought to open and sold short both when stock was at 99, then you lost $4 being long (not $2)

If you somehow timed the market correctky and got a differnet basis (99 for the short and 97 for the long) then you are just market timing, and could have done the same thing by just shorting from 99 to 97 and covering.

i.e. Whenever you hold both long and short in the same amount of shares, you are making zero money, just costing yoursefl commissions.

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#10) On June 17, 2009 at 9:29 PM, ChannelDunlap (< 20) wrote:

Your edited version seems to have the same problem in reverse.  If we're talking a straight short, and not a leveraged short or ultra short ETF, then wouldn't the values be the same?  What you lose on one you make on another, giving you a total of $0?

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#11) On June 17, 2009 at 9:30 PM, millionby24 (< 20) wrote:

#8


#9




Read my Edited One, Sorry I did the stuff off the top of my head watchin family guy lol.


but tonylogan, I'm NOT just losing commision, i'm MAKING money from the other end because i COVERED my shares. So I'm actually +$1000

but on the other side of things, i'm -2,000 , but i'm not really down, I HAVEN'T SOLD, so technically, i can just wait it to come back??


even better, i can buy more when it dips!!!

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#12) On June 17, 2009 at 9:34 PM, BIGGUYISMONEY (< 20) wrote:

Wow I can't belive I read this

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#13) On June 17, 2009 at 9:36 PM, checklist34 (99.71) wrote:

i love the concept of trying to find a perfect strategy ...  it can be done I am sure.

but going long/short the same stock at the same time is always a null outcome less transaction costs.  so its always a real world net loss. 

you'd have to short at the top of the range, cover at hte bottom, and so forth.  like buy at 99, short at 99, cover at 95, and then you'd be profitable by 99 or whatever.

but no, buying and shorting the same amount of something at the same time cannot net a profit.

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#14) On June 17, 2009 at 9:39 PM, millionby24 (< 20) wrote:

#13

So yes, you can always profit no matter what?

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#15) On June 17, 2009 at 9:40 PM, millionby24 (< 20) wrote:

channeldunlap?

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#16) On June 17, 2009 at 9:45 PM, anticitrade (99.65) wrote:

I have a counter money printing idea for you. 

Go to Vegas, bet 1$ on black jack, and everytime you lose double your bet.  Eventually when you win, it will cover all your loses and you will make a $.  Perfect right?  WRONG.  For three reasons: eventually you will not have the cash to be able to double your bet, the "house" has limits on how much they will let you bet at once, and your reward becomes so small that it does not compensate you for your incredible risk.

Statements like:  "I can just wait it to come back",  "The price of a stock ALWAYS goes back to where it has before once in a week, maybe 2 at most." Do not reflect reality.

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#17) On June 17, 2009 at 9:49 PM, millionby24 (< 20) wrote:

#16


It's not like someone would go on a betting spree, u don't DOUBLE your bet in the STOCK MARKET, I don't put all my money in on a stock, then double that, then double that.......

not a good enough analogy


And if you look at charts, what steady stock has not come back to it's orignal levels? what are the percentages????

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#18) On June 17, 2009 at 9:51 PM, TMFHelical (98.81) wrote:

..... and when the stock eventually goes back to $99++...

Uhhmmm ... you don't see a flaw here?

 

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#19) On June 17, 2009 at 9:54 PM, anticitrade (99.65) wrote:

I have some people I would love to lock in a room with you until you work this out.

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#20) On June 17, 2009 at 9:55 PM, millionby24 (< 20) wrote:

.. you study charts?

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#21) On June 17, 2009 at 9:56 PM, millionby24 (< 20) wrote:

continue on the new bloG

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#22) On June 17, 2009 at 10:26 PM, russiangambit (29.29) wrote:

This kind of startegy kinda sorta might work in Forex, where there is much more back and forth action.If you can take a very small position to ride the swings. But it is not worth the trouble. It is not worth to put $500 at risk just to make  $5 over a couple of days.

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#23) On June 17, 2009 at 10:28 PM, JGus (28.74) wrote:

Let me restate what I think what a number of others were trying to say.

Your $500,000 purchase of the stock at $99/share would have netted you 5050 shares (I am assuming no transaction fees or dividends for simplicities sake). At market close those 5050 shares are now worth $479750 (5050 * 95).So, in this account, you are down $20,250.

Your $500,000 would have shorted 5050 shares at $99/share. You cover your short (buy back the 5050 shares) right at EOD and make $4 per share for a net of $20,250.

You are now even on the day.

You then, in AH trading, take your $520,250 and buy 5476 shares for $95. This brings your total shares to 10526.

The next day, it is announced that POT is under investigation by the SEC for multiple accounts of fraud, cooking the books, etc. The stock immediately plunges to $55/share. Your holdings are now worth $578,930.

The stock then lingers between $40 and $65 for the next several months.

Then, in October, the market crashes again bringing every stock down with it. It is now known that beyond a shadow of a doubt we are going through a deflationary depression. The price of potash (along with every other commodity) plummets. The severe market decline, coupled with the deflationary environment, pulls POT to a new low of $15/share. Your holdings are now worth $157,890.

A month goes buy and POT, because of the accounting scandal and the deflationary environment, is forced to declare bankruptcy, thereby completely wiping out any remaining value of your 10,000+ shares.

Your 'no lose' strategy has managed to lose 100% of your $1,000,000.

If you don't believe scenarios like this can happen, talk to investors in GM, Lehman Brothers, AIG, General Growth Properties, Six Flags, Eddie Bauer, Pliant, Magna Chip, Edra Blixeth, Idearc, Chemtura, Baugur Group, Foamex, Primus Telecom, etc., etc., etc. This is but a VERY SMALL list of the LARGE number of companies that have gone bankrupt since the crisis broke in September!

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#24) On June 17, 2009 at 10:40 PM, svande8952 (< 20) wrote:

+1 rec to Jgus, finally some sense!

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#25) On June 17, 2009 at 10:55 PM, finabuddy (95.49) wrote:

OKAY

 1.  If you can do that trade, you have limited your gain to $1000 bucks. You dont make any more. For every tick up or down you gain and lose 1:1.

2. If you think its 99 so you short at 99 and it never goes below 99, you lose.

3. If you think its 99 and its below 99, so you buy, and it keeps dropping you lose.

4. its not a theory, its just a way to limit your gains.

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#26) On June 17, 2009 at 11:44 PM, blake303 (29.25) wrote:

This is hilarious. Broke by 22.

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#27) On June 18, 2009 at 2:43 AM, tonylogan1 (28.14) wrote:

I now regret even bothering to attempt explaining this. Thanks to Jgus for taking on this fools errand... broke by 22... classic

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#28) On June 18, 2009 at 2:55 AM, TMFUltraLong (99.95) wrote:

Oh dear god... how did this even get this far.....

On paper the idea works but its one fatal flaw is presumption. First you have to take into account the probability that commissions are going to eat heavily into your cash pile and I know this because if you had 1M dollars to invest you wouldn't be asking the community this. Secondly as has been pointed out, you're going to have to pay to borrow money on the short side if there even IS a short side available to you. Thirdly, most brokerages will not allow you to play 2 sides of the same position. Fourth, and most important, your model dictates that you know the precise entry and exit points of these companies. Your model is backwards-looking and simply wouldnt stand up to more than a few weeks (if even days) of this without sustaining moderate losses.

If you really want to play the volatility game, go find a 2X or 3X ETF or pick a relatively high beta stock to have fun with. If you are serious about trying to hedge a stock play, consider buying a stock and selling puts on the same stock...though why do I get the feeling that you have no idea what options are.....

Anyhow, i can't explain it better than that. Your theory makes as much sense as Pluto does as a planet =)

UltraLong

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#29) On June 18, 2009 at 9:45 AM, portefeuille (99.60) wrote:

If you are serious about trying to hedge a stock play, consider buying a stock and selling puts on the same stock...though why do I get the feeling that you have no idea what options are.....

I think you meant "selling calls", i.e. writing covered calls (since you hold the underlying). You guys are really brave to answer these questions. I am still not sure the question was not a joke ...

#28 should really settle this "issue"!

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#30) On June 18, 2009 at 3:52 PM, TMFUltraLong (99.95) wrote:

Bingo Porte...it was a late night

UltraLong

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