May 24, 2016

Short

What is “Short”?

The act of opening a sell position in the market.

  1. (1) The selling side of an open futures contract; (2) a trader whose net position in futures or options shows an excess of open sales over open purchases.
  2. To go ‘short’ is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.

Going Short means

“Going short” is simply opening a short or “sell” CFD position to profit from a potential share price decline.

Short selling is the opposite to going long in that the trader wants to sell high and then buy low to achieve a profit.

The difference between the opening and closing price is the profit or loss the trader incurs.

Leverage and commissions are exactly the same.

A short position held overnight receives financing rather than paying financing.

Example of Short trading position

Amy believes Qantas Airlines (QAN) will release lower than expected profit figures and she expects the share price to drop in response.

Amy places a sell order for 10,000 QAN shares at the current market price of $2.50. The margin rate on QAN is 5% therefore $1,250 is required as margin to open the position.

The trade is placed and Amy holds a short QAN CFD position.

When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the RBA rate minus 2% pa.

The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 365 (days per year).

Please note we have not compared this trade to an identical equity trade due to the limitations with short selling physical shares.

Opening Short Qantas Position
Price $2.50
CFDs sold for $25,000 exposure 10,000
Total Exposure $25,000
Commission (0.10%) $25
Margin Requirement $1,250
Initial Outlay $1,275
Closing Short Qantas Position
Price $2.40
CFDs bought to close position 10,000
Position size closed $24,000
Commission $24
Total Outlay $1,324
Financing Received at 2.5%pa based on RBA rate of 4.5%
$2.45 x 10,000 x (RBA – 2%) / 365 **
$1.68
Gross Profit $1,000
Net Profit (Gross minus trading cost + financing received) $952.68
Return on outlay excluding cost of trade 71.95%

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