ok guys I dont need to get this into a big thread but i was just curious how does a bullet work? why does it let you short on a downtick? waht does it do that it allows you to do this and why? I know that only professional firms have access to them, but what particular thing does the bullet posess that allows one to short on a downtick? thnx guys.
Essentially you are not short. You have a long position in your account that is hedged by options. For example, you will have 1000 shrs of xyz that was purchased at 20. You then purchase the sept 20 puts and sell the sept 20 calls. The position can no longer move since the puts prevent losses and the calls prevent profits. Every sale of xyz, is a sale of this long position therefore it is not subject to the uptick rule. Hope this helped.
so you dont need to have the shares in acct, just just buy the puts and sell the calls? so if you want to short something like hitman when he puts up a bullet, he actually places and order to buy puts to open and sell calls to open first, wait for that fill and then go onto shorting the stock???
You may want to look at these: http://www.elitetrader.com/vb/showthread.php?threadid=1229 http://www.elitetrader.com/vb/showthread.php?threadid=340
It is done through software, I basically input I want a 1500 shares (min. size at my firm) bullet and depend on the volume it can take a few seconds. On those summer days it is the same speed as a Direct Plus order. Today I bought 500 DNA one print off the open at .88 and it started to wiggle, as soon as I saw the offer and market reversing like that I sold, and when the offer got larger I quickly put the order in for the bullet, before the bullet is even confirmed I already filled out the order box for a limit sell, and almost right after I filled out the order box, the bullet is confirmed, boom I sold away, no way you are going to get that filled had you been going natural. The behind the scene stuff is not important (which is essentially establishing a hedged position with a stock position + married put, giving you ownership to the stock). Obviously, this is a huge edge when shorting things off the open, and obviously, if you don't use it properly, it won't do you much good . . .
Janko, Hitman is right. At some firms, you do not need to worry about the behind the scene stuff. You just ask for a bullet for 1000 CSCO and they take care of the rest. If your firm does not offer them you can set them up yourself by buying the stock, then buying the puts which have a strike price closest to your purchase price of the stock. To pay for the purchase of the puts you need to sell the calls of the same strike price. It usually costs a little to set everything up but its well worth it.
janko, you bring up a great point (and one that I've been trying to solve in my head since learning about bullets) ....and that is why do you even need to enter into a long position on the stock? take a look at the graph of a long put/short call (1:1) combo and you will see it is the same as short underlying so I don't even need to be at a firm, I just put in the combo order sell calls/buy puts and I've got a 'bullet' am I right?
The only reason you are buying and selling the options is to prevent a loss in the long position. If you sell the stock without having the long position it will be considered an illegal SS. To sell it on a downtick you must be long the stock.
Mugshot, please read my post again, as I think you are not getting my point what I'm saying is that if 'bullets' = synthetic short then you do NOT need to have a long position in the stock because synthetic short = long put + short call (1:1 ratio) hope that is clear
When I was trading a few years ago, I set up an account in my name, and an account in my wife's name. I/we would short a stock in one account and go long the same stock in the other account. When it was time to short, all that was needed was to sell the long position - leaving the short position in the other account. It was common practice at that time, but something tells me it must not be legitimate any more. Sure seemed a lot easier and cheaper than a bullet. I haven't had much trouble putting on shorts in nasdaq stocks since I started trading again, but that obviously is related to one's trading style. Anyone know if this is still legal/allowed. At the time, I was clearing through Penson (don't know if they're around anymore), and they allowed one position to offset the other, so very little margin was needed.