Wednesday, December 06, 2006
Options for shorting
Options for shorting
Shorting stocks usually requires credit, high account balances and lots of protection for the broker. Shorting stocks involves the borrowing of shares in order to buy more to cover the amount you borrowed at a later time.
Its like borrowing a car, selling it for $1000 then one year later buying a car just like the one you borrowed for $800. Giving the car up, you profit the $200. Sell now, buy later at a lower price.
Shorting stocks, especially those with absolutely horrid earnings can be extremely profitable. However due to the inability for many small time investors to sell short due to account restrictions in place by the brokers, the gains are missed by the small investors. There is a very easy way to bypass the restrictions on selling short. The easiest is just to buy put options. These are already leveraged because each option is equal to a share of stock but costs much less.
One could buy a lot, 100, of put options sometimes for the same price of one share of stock. Options that seem out of range sell sometimes for as low as $5 a lot. These usually move in amounts of 5 cents per movement so it would be an instant double if the price gets even remotely close to the strike price.
If you haven’t, you should really check out OptionsXpress or go to your current broker to find the rates for trading options. The commissions for options are generally higher by a few dollars but the amount of stock you control is usually higher as well. Profits by percentage are much greater on a lot of options than on a share of stock.
You don’t have to own stock to profit from it. As covered previously, options are basically buying up the offer to buy stock. Weird thought in our minds to be borrowing something without paying interest. Technically you do pay something to get a return, the price paid for the option goes straight to the lender as a fee for “borrowing” the stock.
Believe it or not, options can be used to short too. Put options are the market gods’ gift to the small investor. Options allow you to short shares for much cheaper while applying the other capital to other trades. Rather than control 100 shares short of one company, I could place orders on 10 different companies with the same amount of money.
I can diversify a portfolio more heavily with $100 in options than $500 of that same money in stocks. Options are a great way to make investments you normally wouldn’t have been able to do.