Why short when you can buy a put?

[SomeYoungGuy]

Never a problem with borrowing shares.

You can roll the contract forward as it nears expiration if you are long-term bearish. Yes this costs, but you have to pay interest on a long-term short position also, right?

Doesn't tie up margin.

More bang for the buck. An ATM second or third month put costs (very very roughly) 5-10% of share price, but will return ~50% of the dollar move of the underlying.

And most importantly IMHO is it limits your downside in case you are very wrong.

What am I missing?

 

[Baywolf]

You are under the impression that more people hedge with a short position than a put option? I'd say that a majority of the longer-term investors would open a put option so they can hedge against a potential downturn without closing their long position. This allows investors to keep a position open long enough to get a long term capital gains rate, even in a bear market. I've always seen shorting as a trading tool.

 

[psytrade]

You're missing that 90% of all options experience worthless.

 

[soltron45]

Gotta be aware of the affect that Time Value has on Long options. Also, short positions generally don't get charged margin interest unless the person has a Type 2 debit.

 

[l2tradr]

Quote from SomeYoungGuy:



What am I missing?

Time frame involved. If I'm looking for a short for 30 cents in a $30 stock, its unlikely I can use puts effectively. Second, the spreads on many options and lack of volume make them hard to trade in the short term due to massive slippage. Sure, not an issue in the SPYs, APPLs and QQQQs of the world, but many names aren't as liquid for options whereas they may be for stocks. Also, the stikes are too far apart in some cases to get the same effect. Like AGU right now, 2MM+ shares on the day, stock at $68 and change and only $70 and $65 strikes, both with 10 cent spreads and 200-500 volume on the day.

 

[heech]

Why buy a stock when you can buy a call?

 

[Ivanovich]

Why not just go long and make easy money?

 

[SomeYoungGuy]

Quote from l2tradr:

Time frame involved. If I'm looking for a short for 30 cents in a $30 stock, its unlikely I can use puts effectively. Second, the spreads on many options and lack of volume make them hard to trade in the short term due to massive slippage. Sure, not an issue in the SPYs, APPLs and QQQQs of the world, but many names aren't as liquid for options whereas they may be for stocks. Also, the stikes are too far apart in some cases to get the same effect. Like AGU right now, 2MM+ shares on the day, stock at $68 and change and only $70 and $65 strikes, both with 10 cent spreads and 200-500 volume on the day.

It's worth it to chase a 1% downside move on a thinly traded stock? I can't imagine it would be worth your time for less than 10k shares, probably 50k or 100k. What are the fees for borrowing that many shares? What time frame would you be looking at for this kind of move?

AGU is up, so I checked my screener for another example. Best I could find in the light volume -1% range was HRB. When I checked, it was 16.63 Down 0.19 (1.13%), ITM put strike 17, last sale was 0.80 Up 0.05 bid 0.75 ask 0.85.

Point taken about the spread. I just didn't know you could bother for such a small move on a thin stock.

 

[SomeYoungGuy]

Quote from Tight Face:

You are under the impression that more people hedge with a short position than a put option? I'd say that a majority of the longer-term investors would open a put option so they can hedge against a potential downturn without closing their long position. This allows investors to keep a position open long enough to get a long term capital gains rate, even in a bear market. I've always seen shorting as a trading tool.

Not talking about a hedge, I mean a short term directional bet.

Quote from psytrade:

You're missing that 90% of all options experience worthless.

You mean expire? We could always buy a bull spread, but I was more talking about shorts and puts in a day trade or overnight time frame instead of holding until expiry.

 

[nazzdack]

Quote from psytrade:

You're missing that 90% of all options "experience" worthless.

?......"expire" worthless? That only applies to out-of-the-money options on the last day of trading. The huge majority of options traded are offset before expiration.