Question

Suppose you short-sell 100 shares of IBM, now selling at $200 per share: (a) What is your maximum possible loss? (b) What happens to the maximum loss if you simultaneously place a stop-buy order at $210?

Answer 1

Answer:

(b) 1,000 dollars

Explanation:

(a) the short sale has the followign process:

you take a "loan" of 100 shares with a broker and then sales them in the market.

Then, you purchase this shares back and return the loan.

You will gain if the stock loss value (becasue you sale at 200 and purchase back at 180 for example)

You will loss if the price goes up

Because there is no limit on how much a share can increase his value, the maximum possible loss can be infinite, as it can raise from 200 to 10,000,000 or 201,000,000

Of course, it could be possible to calculate a possible deviation of a pojected value and from there make statistics based on the purchase variance over the previous period. But technically, there is no limit on how much can the investor loss.

(B) As the contract stops at 210 dollars. There is a certain maximum amount of loss:

short-sell of 200 dollars if it reach 210 then you end up lossing 10 per share

We now multply by 100 shares :

100 x 10 shares = 1,000 dollars