How far must the short fall to pay for waiting?
Calculate borrow and dividends before you call a short attractive.
The question
You short 10,000 shares of fictional Alder Signal at $60 for one year. Use a simple 8% annual borrow fee on the initial $600,000 notional and $1 per share of dividends owed. Ignore rebates, commissions and taxes. In practice, fees and required collateral can change, shares can be recalled and execution may differ.
| Value | |
|---|---|
| Shares short | 10000 |
| Entry price ($) | 60 |
| Initial notional ($) | 600000 |
| Annual borrow rate (%) | 8 |
| Dividend per share ($) | 1 |
| Thesis target ($) | 45 |
| Squeeze scenario ($) | 90 |
Return is measured against initial short notional, not broker margin or capital employed. This simplified fee basis is fixed only for the exercise.
“What is the net profit at $45, the break-even cover price and the loss at $90?”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Price the carry
What would you do here? Open the move you’d make.
Treat dividends as income on the short.
Tempting, but it misses something. Dividends are owed, not earned, on borrowed shares.
Deduct $58,000 of carry.
The strong move. A short seller owes the lender dividends and must pay the stated borrow fee.
See how a strong candidate says it
“Borrow costs $48,000 and dividends cost $10,000. Total one-year carry is $58,000, or $5.80 per share.”
Why it works: A short seller owes the lender dividends and must pay the stated borrow fee.
Step 2: Calculate the thesis payoff
What would you do here? Open the move you’d make.
Report a 25% net return because the stock fell 25%.
Tempting, but it misses something. That omits $58,000 of costs.
Use $92,000 after the stated costs.
The strong move. The 25% share-price fall is not the net short return.
See how a strong candidate says it
“At $45, the gross gain is $150,000. Net profit is $92,000, or 15.33% of initial notional.”
Why it works: The 25% share-price fall is not the net short return.
Step 3: Find the price that just covers costs
What would you do here? Open the move you’d make.
Use $60 as break-even because that was the sale price.
Tempting, but it misses something. A flat stock still incurs borrow and dividends.
Use $54.20 as the cover price at break-even.
The strong move. The investment can be directionally right and still lose money.
See how a strong candidate says it
“Break-even is $60 − $5.80 = $54.20. The price must fall about 9.67% just to pay one year’s carry.”
Why it works: The investment can be directionally right and still lose money.
Step 4: Face the path risk
What would you do here? Open the move you’d make.
Hold any squeeze because $45 is my target.
Tempting, but it misses something. A target does not prevent a recall, a margin call or a broken thesis.
Explain the $358,000 loss and review borrow, liquidity and exit conditions.
The strong move. The squeeze case is not a maximum loss; a common stock has no fixed upper price.
See how a strong candidate says it
“At $90, gross loss is $300,000; with carry it is $358,000, or 59.67% of initial notional. A higher price could cause a larger loss before my thesis resolves.”
Why it works: The squeeze case is not a maximum loss; a common stock has no fixed upper price.
The answer, in short
- Decision
- The $45 outcome nets $92,000 under these assumptions.
- Because
- Carry costs $58,000. Break-even is $54.20; the $90 scenario loses $358,000.
- What would change it
- A changed borrow quote, a delayed catalyst, new business evidence or inability to maintain the borrow.
Common traps
- Ignoring dividends owed.
- Quoting return on notional as return on margin capital.
- Calling a squeeze scenario the maximum loss.
Check your answer
- Did I deduct $48,000 of borrow and $10,000 of dividends?
- Did I calculate $92,000 net at $45?
- Did I get $54.20 break-even?
- Did I get $358,000 loss at $90 and explain why it can be worse?
Last reviewed Nov 10, 2026