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Offline dsd

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How does shorting work?
« on: August 28, 2014, 08:17:25 PM »

I'm not very well versed in the world of finance and trading, but BitShares has piqued my curiosity and I'm pretty interested and excited about it's potential so I've been reading a little bit.

My understanding of short selling is that I borrow an asset and sell it to someone for X. Then later I buy that same asset for Y, return it to the lender, and make a profit of X - Y. This leads me to believe that my account balance would go through these steps:

1. Original balance
2. Original balance + X (Open short position)
3. Original balance + (X - Y) (Close short position)

Or if I had to collateralize my debt, I would assume that my balance wouldn't even change at all until I closed the short position, since I would put up the collateral to borrow the asset, immediately sell it for the same amount as the collateral, buy it back later at a different price, return it to get my collateral back, and ultimately be again left with a profit of X - Y.

In order to play around with this, I opened a very small short position on bitUSD, however I feel I must be missing something because my account balance was docked the value that I sold it for (presumably as collateral for the loan), but I never received any BTSX for the sale. To make it easier to follow I'll just use actual values:

I opened a short position for 7 bitUSD at 24BTSX/bitUSD, which was immediately sold to someone with a bid at that price.
My account balance was reduced by 168BTSX.

This is where I get confused, because the way I expected it to work is that I now have to buy 7 bitUSD to cover my short position, at which point I would get my 168 BTSX back. Say the price goes to 20. I buy 7 bitUSD for 140 BTSX, then return the bitUSD to get my 168 BTSX back. However at this point I've spent 308 BTSX, so even though the price went down, I've still lost 140 BTSX. Can someone explain what I've misunderstood, and how the whole process of shorting/covering works on the BitShares marketplace? Thanks!

Offline toast

Re: How does shorting work?
« Reply #1 on: August 28, 2014, 08:24:16 PM »
you have an additional 168 BTSX in collateral from the bid other side. If you buy 7 BitUSD you can get 168 * 2 for it by closing your position
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline dsd

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Re: How does shorting work?
« Reply #2 on: August 28, 2014, 08:39:20 PM »
Ohhh okay, that makes sense. So you always put up 2x the value as collateral for taking a short position?

Also, are there any dividends/interest issued to holders of bitAssets that would need to be paid back when closing a short position?

Thanks again; I really hope this thing takes off, it seems like a great addition to an investment portfolio and is pretty fascinating in general. Keep up the good work!

Offline Shentist

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Re: How does shorting work?
« Reply #3 on: August 28, 2014, 08:40:09 PM »
if you short 7 bitUSD to 24BTSX you "lend" 168 BTSX + collateral to the counterparty to get the bitUSD in existence

on your balance bitUSD is 0 (zero)
btsx is reduced with the collateral. o
on his balance 7 bitUSD are created (maybe you did the wrong thing? You get only bitUSD if you are buying)

so someone just bought from you 7 bitUSD and are willing to pay you 168 BTSX

now the price of BTSX are rising to 20 BTSX a bitUSD and you decide to cover your position. luckily you have only to pay 140 BTSX to cover. now your and his collateral are unfrozen and you get your 168 +collateral back + his 168 BTSX he already spend in the past but was also frozen.

Your profit ist his 168 BTSX - your spend 140 BTSX for the cover operation = 24 BTSX

Offline wmbutler

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Re: How does shorting work?
« Reply #4 on: September 17, 2014, 10:36:51 PM »
ok,

I either don't understand how this is supposed to work or the BTSX client is not functioning properly. I'm running version v0.4.15-1-g729987b (Mac OS X)

  • I found a BID with approximately the number of shares I wanted to short at a price I was comfortable with
  • I issued a short by by letting it auto-populate by clicking on that bid line item
  • I submitted and confirmed the short
  • The short is now showing with a cancel option
  • The short is NOT showing in the ask column
  • The short has NOT been filled even though there is still an interested buyer in the bid column
  • The short WAS within the median range

I'd post screenshots but this chat board doesn't seem to have a way to upload them, but I have them if anyone is interested.

« Last Edit: September 18, 2014, 12:11:05 AM by wmbutler »
PTS: PnBVP1iLTsV6U8z4BeJYhF8jMpkLhtTi9r
BTS2.0: billbutler
There are 10 kinds of people. Those who understand binary and those who do not.

Offline toast

Re: How does shorting work?
« Reply #5 on: September 17, 2014, 11:40:03 PM »
It is probably below the median feed ("out of range"). You can only short when someone wants to buy it at $1 according to the feed.
Do not use this post as information for making any important decisions. The only agreements I ever make are informal and non-binding. Take the same precautions as when dealing with a compromised account, scammer, sockpuppet, etc.

Offline wmbutler

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Re: How does shorting work?
« Reply #6 on: September 18, 2014, 12:09:58 AM »
It was within the median range, well within the range. The client restricts the trade outside the range anyway, but I verified it before placing the trade.
PTS: PnBVP1iLTsV6U8z4BeJYhF8jMpkLhtTi9r
BTS2.0: billbutler
There are 10 kinds of people. Those who understand binary and those who do not.

 

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