5. (Actual numbers are used in this example!) Suppose you sold short 50,000 shares of GME (yes, GameStop) on January 26, 2021 at the closing price of $147.98 per share. On January 27, GME stock closed at $347.51 (and was well over $400 intraday).
a. What would have been the initial value in your trading account on January 26, and how much of that was your margin investment? $11,098,500 in account; $3,699,500 in equity.
b. What is the value of your equity on January 27 before your margin call? -$6,277,000 (that’s right – negative equity!).
c. What is the value of your margin call on January 27? $14,964,750.
d. What is the value of the equity in your trading account after making the margin call? $8,687,750 (which, of course, is 50% of the current value of the stock you owe – what you must buy back to cover your short position).
e. This isn’t a question, rather a cautionary tale about short selling. If you had made the short sale at the closing price on January 12 (instead of January 26), you would have sold at $19.95 per share. And if you were forced to close out your position at the closing price of $347.51 on January 27, you would have lost $16,876,750 on your $498,750 investment (initial margin). That’s a return of -3,383.81% over a 15-day period. The annualized return (effective annual rate of return, EAR) is a NEGATIVE 33,367,510,000,000,000,000,000,000,000,000,000,000.00% annual return.