Safer Way to Short a Stock
Buying Put Option Versus Shorting a Stock
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When you are “shorting a stock” you are betting that a stock will be declining in the price per share. You make money as the price of the stock drops.
When you short a stock, your brokerage firm lends you shares and you sell those shares on the open market.
Assuming the price of the stock drops, you cover the position by buying back the shares to return to the brokerage firm. The difference in price is your profit.
The danger that presents itself is when the price of the stock you shorted rises in value, there is no cap on how much money you might lose if the price continues to soar. Of course you can control some of the loss by setting a stop loss alert at a pre-determine price or percentage.
A better and safer way to profit on a declining stock is to buy a put against it. The most you can lose is the premium you paid for the “put” plus any commissions on the transactions.
When you buy 1 contract (option) you control 100 shares. A put option gives you the right but not the obligation to sell the stock at a specific price by a specified expiration date.
The amount you pay for the put option called the premium will depend on the volatility of that stock and how far in the future the expiration date is.
With options, you have to be right in both the direction and span of time to win.
In order to trade options with your broker, you will need prior approval that will depend a lot on your trading experience, size of your account and net worth.
There are several levels of approval that you should discuss with your broker which will determine what option strategies you will be able to trade.
Below is a short video on buying a put option and the sponsor offers a complete option training course for free.
I taken the course , the training is very good.
Daniel F. Iuculano, AAMS CMFC
Accredited Asset Management Specialist
Chartered Mutual Fund Counselor
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