Short selling 100 shares - what is my maximum possible loss?

Question

If I short sell 100 shares of a stock that is now selling for $120.00, what is my maximum loss (assume that I did not place stop-buy order)? I believe that the answer to that is dependent on how high this stock eventully goes. If the stock goes to $150, then I lose $30.00. $30 * 100 = 3000. So my loss is $3000.00. Is this correct? If not, how can I determine what my maximum possible loss would be?

For the same 100 stocks - let's say I place a stop-buy order at $128, in this case, does this now mean that my maximum loss is now $8.00 * 100 = $800.00?

Answer 1

your loss is unlimited EVEN IF YOU HAVE A STOP BUY. The stop buy just says to convert your order to a market order if the stock goes above 128, it does NOT say sell it at exactly 128 (someone has to buy the stock, and unless you buy a call at 128, there is no guarantee that someone will buy at 128). If the stock is $127 and it jumps over night to $1120, then you lose $10K (not practical, but possible)

Answer 2

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In theory the maximum loss is infinite. that is not a particularly helpful answer since the same is true if for one share or one million shares.

In practice, the maximum loss depends upon the amount of margin you have in your account, so the maximum loss for a $1,000,000 account is much bigger than the maximum loss for a $10,000 account. When you exceed your available margin your broker will force you to close the position or add more cash to your account. In extreme cases it is possible to lose more than is in your account and end up in debt.

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Correct.

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Yes.

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Usually, but not always. If there is a large gap in the price of the stock it is possible for the price to jump well past the price in your order. For example if it is announced that your company has agreed to be acquired by another for $150 per share you will not be able to cover your short position for $128 per share even with the order in place.

Answer 3

Don't buy this crap about an "unlimited" loss. You can cover with a click of a mouse - no need to sit around and wait for the loss to become "unlimited".

If you buy/short right, you should ALWAYS limit your loss to no more than 10% of the amount invested.

The real question is: what is your maximum risk?

There are 2 risks in shorting:

1) short squeeze - a thinly traded heavily shorted stock can shoot up 20%+ in a matter of minutes.

2) a buyout. As GLYT shows, a 50% premium is not out of the question.

Answer 4

At some point, the brokerage is going to call you on the short sale, plus IBM is not going to go to $10,000 a share in a flash. You are selling now at $120 with the idea that you will buy at a later, lower price to get even on the number of shares. You can set a strike price that limits your downside, say $140, so you are at most out $20 a share, or $2,000. You might set one further out, but the likely hood of the stock even doubling in the period you hold the position is next to nil, so $12,000 would be a real world absolute maximum loss.

Answer 5

Maximum possible loss can be infinite. Next time if you want to short something, try options trading. You can either sell call options or buy put options if you think the stock is over-priced or the downside risk is greater.

In that case, you have a high upside potential with very low risk (option prices are a lot cheaper than actual stocks).

Answer 6

You are thinking the right way... it doesn't matter what company it is, the maximum possible loss on a short-sell is *unlimited*, because the stock can rise in price without bounds. That's why shorting stock is considered risky.

And yes, most people will use a buy-stop in exactly the way you mentioned in your example. Your numbers are correct. This will limit your potential loss.

Hope that helps!

Answer 7

In theory, your maximum loss is incalculable. The price can go up and up and up, increasing your loss as it climbs. In practice, however, an infinite price is not possible over the time frame that a short sale can be carried. But a huge loss is very easy and a frequent occurence.

You original calc. is correct, but the problem is that you cannot accurately predict future prices.

Answer 8

1

Answer 9

Maximum possible loss???
Think about how much one could have lost if one shorted 100 shares of Berkshire Hathaway shortly after it's IPO, & is still dumb enough to have it short. Or how about Google?
Getting the idea? If not, the answer is LOTS.