Calculating relative performance of a short trade

You gain 30% compared to the index - here's why:

Let's say the stock is trading for $10 and its benchmark index is at $100. You put a $1,000 short trade on the stock (short 100 shares).

The stock goes down to $8 and the index to $90. Your short position is now worth $1,200 (you gain 100*$2 = $200) for a 20% gain and the index has a 10% loss, so relative to the index you've gained 30%.

I will say that a "long" index is not a great benchmark to use for a short trade. The returns will be in opposite directions.

Suppose instead you reversed everything to the long side.

Example:

• I make a long trade and the stock rises by 20%. During that period, the index rises by 10%.

• Have I made a +10% positive return on that trade relative to the index or a +30% positive return relative to the index and why?

Assuming an equal dollar investment in the stock and an index ETF, you made 10% on the index and 20% on the stock. That's also twice the return if you're comparing ROI.

The answer is the same for the short positions, assuming that the respective margin requirements are the same.