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URL:  http://boards.fool.com/newby-qs-on-short-selling-as-a-price-freeze-etc-29927484.aspx

Subject:  Newby Qs on short-selling as a price-freeze etc. Date:  3/22/2012  2:17 AM
Author:  krystoff Number:  44559 of 44621

Hello friends of the CAPS "Shorting Stocks" forum. I only started short-selling last week. (Wish me luck!) And I am not here today to discuss my shorting strategy. Instead, I have some basic newby questions about short-selling itself. Thank you anyone for any help.

1. ISN'T IT BETTER TO SHORT AN ETF THAN TO BUY AN INVERSE ETF--BECAUSE SHORTING HAS NO SIGNIFICANT FEES?
2. IS IT FEASIBLE TO USE TRADITIONAL SHORT-SELLING TO FREEZE THE VALUE OF PHYSICAL GOLD ASSETS? (& SILVER & PLATINUM.)
3. ARE OPTIONS BETTER THAN SHORT-SELLING FOR THE PRICE-FREEZING OF ASSETS?



1. ISN'T IT BETTER TO SHORT AN ETF THAN TO BUY AN INVERSE ETF--BECAUSE SHORTING HAS NO SIGNIFICANT FEES?

As everyone knows, an inverse ETF is inefficient. Over a year, it will often end up -10% lower than the true inverse. It is only "maybe" useful for short-term trading. And even in that case, isn't it better to use another method which does not carry the -10% annually? I want that 10% annually to go into my pocket, not into overhead. It seems to me, the only downside to short-selling vs. inverse ETF is that you can lose more than you expect. However this seems virtually impossible when shorting an entire index, which is never going anywhere very quickly.

I.e., it seems to me that an 'inverse ETF' is like playing poker at a casino with a huge 'table fee'. Win or lose, you must pay this added cost. Shorting an ETF is the same game but with negligible table fees.

Last year, I read in the CAPS MI forum that short-selling backtests are very problematic, implying that the fees of shorting vary and the more attractive a short position is, the higher the fees. (?) At that time, I had never done short-selling, so I did not question these statements. However, now that I am doing short-selling, I do not find any significant 'fees' except margin interest and the usual trade costs (1/2c per share at InteractiveBrokers, usually amounting to the $1 minimum if you only trade with stocks above $2).

Questions:

a. Am I correct to conclude that the person complaining about the 'fees' was talking about options? Traditional short-selling has no such 'fees'? This is my experience and also what Fool.com's 'Short Selling FAQ' seems to imply, which generally disparages the use of options. http://www.fool.com/FoolFAQ/FoolFAQ0033.htm

b. What is the APR (annualized percentage rate) of a typical 'margin interest'? IB has an interactive 'interest charged to you' page at http://www.interactivebrokers.com/en/p.php?f=interest&ib...
...I put in $10,000 and it reported back 1.65%... but is this daily, monthly, annually (APR) or per-position?

c. Other than that, during my 1-week of short selling, I have come across ADR fees, temporary moratoriums, and a few other anomolies. But so far, I find no significant shorting fees.


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2. IS IT FEASIBLE TO USE TRADITIONAL SHORT-SELLING TO FREEZE THE VALUE OF PHYSICAL GOLD ASSETS? (& SILVER & PLATINUM.)

This week, I stumbled on an article that suggests short-selling your own positions as a method to avoid short-term capital gains taxes. http://seekingalpha.com/article/400371-dodging-taxes

It occurred to me that the same method can be used to freeze the effective value of gold, silver and platinum assets. Why? Please note that gold has two separate attractions:
-- GOLD IS AN INVESTMENT. You believe the price will go up.
-- GOLD IS SAFE MONEY--a bulletproof alternative to FDIC accounts.

PROS. If this works--the result is technically 'safer' than FDIC or US Treasuries. USD$1k in --> USD$1k out. Totally guaranteed regardless of bank failures.
CONS. Even if this works--you can expect $0 appreciation. Zero protection against inflation or the collapse of the US dollar. (Assuming you short in US dollars.)

Walking myself through what might happen...

SITUATION 2a: "Gold Up".

* You start with $10k of gold and a $10k short on GDX.
* Later, imagine for example your gold is $15k and your short is $5k. You sell $5k of gold and repay $5k owed on the short. US citizens pay 'commodities' tax on the 5k--but you have a 5k deduction on your regular/short-term/earned income. If the deduction outstrips one year of earned income, you can take as many years as necessary