If I sell short at $10 and cover at $2, my gain is 4x, right? On the short I reported, my sale was at 2.44 (all-in). The then-current Ask (or where I could have gotten out) was 0.28. Add a penny for vig and do the math. The gain is 841.37%, right?
The 100% you’re thinking about is ‘capital-at-risk’. On a long, you can’t lose more than your purchase-price. But on a short sale, you could get squeezed and end up having to cover at a multiple, as some idiot did a while back. Not only had he failed to set up defenses, not only had he over-bet his hand, but he was leveraged to boot and went BK. Just as there are stupid ways to buy, there are stupid ways to sell short.
Let’s take a real-time example. I sold short an oil company stock just now at $3.62 as a test to see whether shares were available. Earlier, I had tried to short a different oil company, but shares weren’t available. It made no sense to me at all that these two companies had all but gapped up by 20%-40% on a down morning for the market when their fundamentals sucked so badly. (One had a negative net-worth; neither could pay current expenses from current revs.)
My vig was $0.005/share, $1 min/ticket. So I needed to cover at least 4 cents lower to BE (break even). Roughly 12 minutes later, I got kicked out at 3.55 on a too-aggressively placed stop. But also, I didn’t care. I was running a test, not positioning myself for a long-term play. (What you B&H types call “an investment”.) Net on the trade was a nickel/share. On a round lot, that’s just lunch money. On size, it could be a day’s wages. It all depends.
Let’s assume ‘size’ was a round lot. Time in trade was 12 minutes. Net would be $5, or $60/hour, which is plumber’s wages, right? which is a reasonable benchmark, because if you can’t make at least plumber’s wages from your investing/trading, you’re in the wrong union.
It’s not my preferred or habitual mode to slam stocks around. Nor do I need the money that can be obtained. My retirement is fully funded out to age 111 provided I don’t lose more than an average of 4%/year. But since my long-term CAGR (over 31.3 years) is 14.6%, I’ve got a reasonable margin of safety and can choose what I do in markets, which is mostly just exploratory stuff. I buy and sell because I can, not because I have to. Why keep investing/trading skills honed? Because we are entering the mother of all bear markets, which will be far worse than the 2008 correction, far worse than the '30s correction, and them that can’t cope will get killed. What I know about markets and can teach to my daughter is what will give her a survival edge in a world far different financially from ours in which --among other things- the US$ will no longer be the world’s reserve currency. Hence, if not an end to the US’s endless deficit-spending, at least a slowing down of it and --hopefully-- fewer of the US’s endless wars of choice.
Thanks for your question, by the way.