Again, depends on your time horizon, many scalpers will scalp for far less than 1% and on minimal shares. Plenty of people I know that trade AGU and POT for dimes and make a decent living doing it. Fees for borrowing won't matter for a very short term trade, unless it really is crazy like 25% p.a. and even then... For swing trades, sure, you can replicate a short position with puts, it just depends on the stock involved. To address the "thinly traded" part...there are MANY stocks that are NOT thinly traded nor hard to borrow that have very low option trading activity.
Are you implying buying a put option would be better? The risks in options are time decay, changes in implied volatility and slippage. With options on SPY or QQQQ, the difference between the bid and ask is a lot smaller because of the larger trading volumes so this reduces the slippage. SPY and QQQQ usually have smaller moves percentage-wise versus many individual stocks so the implied volatility is lower which reduces the risk of a volatility implosion. And to defeat the time decay, you could buy a long term option. I looked at the whole March, 2009 to January, 2010 period and compared several different ways of trading it. First, I compared the double leveraged ETF on the S&P500 (the symbol SSO) to sector ETFs like the financials (XLF), commercial real estate (IYR), alternative energy ETF (PBW), spyders (SPY), cubes (QQQQ) and market "leaders" like Google (GOOG) and Apple (AAPL). The SSO overperformed a lot of markets. However, when comparing options, I think the cubes are somewhat more realistic because of the smaller spread. In any case, I looked at various methods to trade the SSO that would have resulted in either many trades during that period or 5 or 6 trades or 12 to 15 trades or even doing just one large trade. As you can imagine, using the options calculator on the cboe website, I calculated the long term out of the money options on the SPY could have made you possibly more than 50 times your money during that period with one single trade. I'm not implying this is the best. I'm simply saying in theory, this would have made the most money. There are many possibilities however. One idea I thought of would have been to buy SSO on 50% margin (in other words, buy twice as much with the same money) and buy a long term far out of the money put option on SPY (because it was much more expensive at the time) as a way to hedge the leveraged position. Unfortunately, there's no huge dive in the S&P 500 right now so we can't take advantage of a large move. However, the EUR/USD has gone down far and has done a quadruple bottom which may imply the end of that downturn. You can look at the fxoption dot com website to see which brokers deal in forex options. I'm mentioning options because when I was looking at the March, 2009 to January, 2010 period, when I looked at the method which would have resulted in many trades, in reality even if the method I was examining would have resulted in a profit, the large quantity of small losses here and there would have taken a large bite out of the overall profits. So, I have a new respect for the idea of doing longer term trades. I used to think you had a mathematical advantage in trading short term. I suppose if you were ABSOLUTELY convinced a market was going in one direction for a while, then from a mathematical point of view, I guess riding huge paper losses and refusing to sell for a loss would be one way to increase your chances. That's why I looked at options because you can't lose more than the money you put into it. (This explains I think why some people were able to become almost overnight millionaires at the end of the 1990s. Their strategy of always going long and refusing to cut their losses in some ways was smart. Some people will insist this is a "dumb" way to trade and that these people were not real traders so that's why they lost their fortune when the markets dove. But, I now believe the only reason some of the people who traded like this became "losers" is because they failed to change their directional bias once the markets changed direction. I believe this way you could always use a couple of moving averages on a daily chart to determine direction. Or even one of the most powerful ways is to simply do your peak and trough analysis, in other words, looking at relative highs and lows.) For now, I only have a couple of micro lot forex accounts. The strategy I want to use in one account however for the EUR/USD is trying to jump on the next wave up. I want to get in with very small stops and once I get in and see I'm no longer being stopped out, just ride the move up for a significant large move. My method has not confirmed a change in direction yet in the EUR/USD. It may happen in the following week because it's getting closer to turning around or so it seems. I'm not a fundamentalist, but I doubt the EU will let Greek or any of the other countries that are at risk default on their bonds. That's why think the US stock market was able to shrug off the "Greek crisis" of the last few weeks and manage to go up higher. If I'm wrong however, then the S&P500 looks ready to make a double top. And the possible EUR/USD potential turnaround will have been a small retracement I guess.