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The Math of “Shorting”

I was lectured and told that I didn’t understand the “math of shorting” via a YouTube comment. I’ve been wrong many times in my life, so let’s go through the math together and see “how” the math actually works.

If you’re not sure “what” shorting is, first watch THIS video.

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Transcript:

Today we are talking about math.Math in regards to shortingand after somebody lectured me and told methat I'm doing the math wrong,I'm gonna double check thingsand hopefully we can all learn together.This is why I read the comments section on YouTubebecause the material is awesome.I mean, there's gonna be a never ending stream of materialwhen things like this pop upand some of this is kind of just you know,kinda tongue in cheekbut there is actually valid math and there's valid learningthat we can get from it because this is not the first timethat you know, this person has kind ofgotten up on their perch and lectured down at mebut in doing so has just kind ofnot made themselves look so good.But this person throws in a final,that's supposed to be a jab to methat kinda just punches themselves in the face.But like I said, I do agree with what they sayso that's what we're gonna talk about.Learning the actual math behind shorting.So let's first get to this YouTube commentbecause the numbers they use,I'm gonna use those exact numbers'cause maybe you think this person's rightand maybe they are right but let's run through the mathand let's exactly see how the numbers work out.So Leo says,"This video is flat out f-ing stupid."You can ignore number one but number two."Risk works both ways and your math is off."If a stock gaps up 300% from $1 to $4"and you short it down to $1 you made more than 99%."As a trader the first thing you need to learn is math."Leo, I agree.The thing as a trader you need to learn about is math.I am not gonna argue about that.So let's do some math because right now,our maths are conflicting.You're saying that by shorting you can make more than 99%.So let's go through this and use your numbersand I'll throw in one number.Let's just say that the magic numberthat's being shorted is $500.But everything else Leo, you know,I'll use your numbers.So you said that this stock goes from $1to $4.So no problem there and then you saythe stock goes back down to $1 from fourand that you short it up here.So, four minus one is what?Three right?So you made $3 per share on the short.Hopefully everybody can follow along but like I said,I am doing this in kind of a tongue in cheek fashionbut if you're not sure how the math behind shortingactually works, this is how it works.So shorting you wanna make money when prices go down,as Leo said, if you short something from four to $1that would be a $3 gain.So the math isn't difficult.That is how it works out.So the question now becomes,alright, well you had $500so how many shares could you have shorted for $4?So, $500 you have and the price at that time was $4.Pretty sure that's 125 let me grab my calculator.Just, let's make, the TI83, who remembers this thing?Classic, divided by four, yeah 125.So that means you have shorted 125 shares.So we already established that you made $3 per shareon the short and we as we just talked about,well how many shares did you short?Right there right.125, so let's multiply that by the profit per share.So multiply by $3 per share.Oh great, I need my calculator again.I should be able to do this is embarrassing.Well if that's $375 right?We better double check.I don't want Leo to get made at me.125 times 3 is 375.Okay, so your profit here, let's go to another color.Your profit is $375.Hopefully everybody's following along.So let's actually calculate the percentage,the return on the money because remember,according to Leo this yield's more than 99%.So a very basic return on investment equation.You had how much money?You had $500 that you started withand to calculate your return on investmentyou would divide that by, well your profit.What did that $500 actually get you?That $500 got you, $375.So when you divide that, goodness.I need to put this in another spot.375 divided by 500 is .75.So of course you need to, better change the color.I need more hands.What color haven't I used yet?So that is giving you .75.Remember back to college or high school, or middle school,how do you convert a decimal to a percentage?You multiply it by 100 so times 100 equals what?That is a 75% return on your money.Let's quickly go through this again.Let's say that this thing went from $4 all the way to zero.Meaning basically the perfect trade.So what does that mean?Well that means thatlet's see, here you made$4 per share okay?So here you made again, $4 per share.I know the answer here but let's just so you,type in 125 times $4 per share profit equals $500.So in this case you made $500.So now how are you gonna calculatea return on your investment?Well let's change up the colors againand well, you started with 500, yeah.Am I still on the screen?Okay, so 500 is what you started off withand then how much money did you make?Well according to the profit you made $500.When you divide that what do you get?You get one.You gotta convert that to a percentage.Times 100% equals what?100% return, in other wordsthe best you could ever do on a short is 100%and that implies that it literally goes down to zeroand you can capture every little bitof that move.So Leo, I agree as traders we do need to understand math.But this right here is the math of shorting.You cannot gain more that 100% on a short.Now if you wanna say,"Well I was using margins so technically speaking"it was only like $10 a."That's not what you were saying thoughaccording to your premise.You wouldn't bring up margin at all.So that's not what you were sayingand, but that, this is how the math works.As a whole, shorting you cannot make than 100%.Another way to look at this,if somebody were to say,"My car just lost all of its value."What would you think?Percentage wise, it lost how much of its value?You would think, well it lost all of it.So that would be, it lost 100% of its value.You would never think,"Oh wow, sorry to hear that."I'm sorry to hear that your car lost 125% of its value."No, if I tell you that all of the pizza is goneand you think about that as a percentage,you're gonna think,"Oh man, you guys ate 100% of the pizza?"Nobody's gonna say, "Oh you guys are,"you guys are just savages."I can't believe you ate 175% of the pizza."No, that doesn't make any sense right?The same principle is here.The amount of value something can loseis all of its valueand all, defined mathematically speaking is 100%.So Leo, agree.Traders need to know how to use math and learn mathand hopefully you learned something Leo watching thisbut because this is, this is how the math workswhen it comes to shorting.If you are out there trading alone currentlyand maybe are in the market looking for a community to jointo assist you in your trading or to just help you, you know,give you another set of eyeballsthen I do have a private trading communitywhere you can trade alongside meand other experienced traders.So what you see poppin' up on the screen right nowis both an information linkso if you click on the inner circle one,that is going to take you to the pagewhere I explain all the detailsof what exactly come with the community.Both the chatroom and the newsletterand then the other image that has popped upis a behind the scenes tourwhere you can see exactly what is going to you know,be contained within the community.I take you through, like I said,a behind the scenes tour of everythingand that way you'll know, precisely what you are gettingyou know, when you join.So definitely check that stuff outif you are interested and thinking about you know,wanting to join a communityand let me know if have any questions.

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