This is one of the question that was bugging me some month back.
Suppose I am sitting with a 80% short term gain in a stock A. Now I found another stock B, which is expected to give me 15% extra gain in a year timeframe (as compared to A). The question is should I go for it.
When though without thinking anything, it seems a buy. But when one consider the 15% ST tax, plus 1.5% switching brokerage cost, plus 10% of margin of safety, this doesn’t seem a good deal.
Buying price 100, gain 80, ST tax 9, Switching cost ~3 ==> Total proceed = 168. Effective loss because of switch 12/150 = 6.7%. At a 10% margin of safety, this doesn’t look so good.
This is the final output for decision graph without and with 10% margin of safety.
1). This one is for the case of short-term profit. For long term profit the expected delta is (Switching cost + Margin of safety)
2). This one assumes you have some short term gain is your kitty for negative profit case
3). This one is time agnostic. If you have just 7 days to convert your ST gain to LT gain, this sheet is not for you.