Right Strategy for Shorting

Discussion in 'Trading' started by Andiroo, Apr 4, 2010.

  1. Andiroo


    Hi All

    Can anyone suggest the merits of using options to short a stock versus outright shorting the stock.

    I want to short a stock that i think will drop to half its current value in the next 6-12 months. It currently trades at $22.

    Jan '11 $10 put options currently trade at $0.45.

    Obviously with the options i limit my downside but what are the merits of an outright short. I think the stock could drop some way below $10 if as i suspect there is a lomng pipeline of bad news.

    Thoughts / advice welcome.

    Many thanks

  2. GG1972


    Benefits options vs stock for "shorting" you can make more than 100% but timing has to be right-time decay is your obvious enemy, if you buy wrong price or wrong strike options.

    Benefits of outright stock short vs options - timing not that crucial as long as your stop is honored --if stock takes 3 months to fall as opposed to you thinking it may fall in 2 months, you will still make money. Only downfall in shorting outright stock is you cant make more than 100% that is if it goes all the way to 0.
  3. How liquid are the options?

    If you know you're right, then buy a variety of strikes....

    50% at the money
    25% slightly out of the money
    25% very far out of the money (say $10 strike)

    You could also vary this by you're expiration date instead of how much they are at or near the money.

    People short a lot of stock because premium is often built into trading events, and the equity shorts avoid time decay.

    Also, the general rule is don't bet more than 3% on a trade. So if its strictly far out of the money, I would buy 100% far out of the money options on your conviction trade. If some macro or fundamental things interfere with your trade, then you might want more at the money options, which also have less risk, so you could outlay say 6% of your trading capital for the trade, because if they are at the money say you only have a 50% chance of losing money (the trade risk is still 3% on average because the odds suit you in the trade) Its like sizing an equity position with at the money options, but with far out of the money it becomes a max loss kind of trade, how much can you afford to lose, maximum.
  4. Andiroo



    Both these posts are really useful. This is certainly not a HUGE conviction bet the house trade but if i have done my research and built up the picture that i think i have built up (albeit based on macro factors) i think this is worth risking a couple of percent of my portfolio on. I quite like the idea of laddering my exposure via a range of out of in the money and out of the money puts. I am not sure how i can get the numbers of daily volume but its a stock with a market cap of $3.6B so its far from a tiddler.

    I would be happy to share the name but then i will be spat on by others here - albeit getting some sense on how to play it would be useful.


  5. charts


    You may want to look into a back-spread... Play with an options position simulator. :)