Monday, January 30, 2006

Update On Stock Shorting

At the end of December I discussed a hedging strategy for making money of the price disparity between stocks and bonds that I implemented myself on 12/30/05 when I purchased 18 shares of SPY at $124.8388/share and sold short 25 shares of TLT at 91.9068/share.

I closed out my positions on 1/19/06 when I sold my 18 shares of SPY at $128.05/share and bought back 25 shares of TLT at $92.1376 to cover my short position. After accounting for the $5 commissions charged through Ameritrade's Izone brokerage, I initially calculated my gain to be $31.95. However, I checked my account yesterday and discovered that I was also charged a margin fee of $7.70, bringing the total gain down to $24.25.

I was not aware that I would be charged a margin fee, and this does seem to minimize the benefits of this hedging strategy. Apparently when one shorts an equity, the brokerage house adds the proceeds from the short sale in the customer's account, but the funds are typically not available to purchase anything else. Accordingly, to purchase another equity, the customer either has to use other cash already in the account or borrow on the margin from the brokerage house.

I realize these were not large transactions, but I undertook this set of transactions to learn about the fees and other costs involved in shorting equities.

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