How do I short? Is the number one question I get all the time once people hear that the past 2 years have been the best trading years I have ever had. I get the look of “um yeah your full of s$%#” so I have to show them there are 2 sides to the market. Shorting stocks is not hard and yes there is risk, but how risky has it been going long the past year or so? And a plus of the downside is that stocks go down a lot faster than they go up. For instance at the low of March 6th, 2009 we erased all of the gains from 1996-2007 (11 Years) in the matter of 1 year and 5 months.
I’m going to keep these 3 ways very concise and open for discussion. Easiest to complicated:
1. Buy inverse ETFs. Advantages:
- These have the same great characteristics of ETFs and you can purchase them just like any other stock or ETF throughout the trading day.
- There are even inverse ETFs that are double or triple leveraged, which means as an example if the S&P500 goes down 2% on a given day and you owned SDS (double short S&P) you would make 4%. **Note leveraged ETFs (2x and 3x) are known to not trade exactly relative to their index but for the sake of simplicity the concept of how they work is accurate for this article**
- Another great advantage of investing in inverse ETFs is that you can buy these even if you cannot have a margin account, such as in your tax-deferred savings accounts (401(k), 403b or IRA)
For a list of inverse etfs view the post, 40 Great Inverse ETFs For Bearish Investors.
2. Short stocks straight up. This requires a margin account. The pluses are:
- You don’t get any price nuances, which happens sometimes in the inverse ETFs, where an inverse fund isn’t exactly performing as well as if you shorted directly.
- Still very easy to do using most online broker consoles instead of selecting “buy” a stock select “short”
3. Options. This requires the ability to trade options with your broker, which usually means some extra forms to fill out. Advantages:
- Leverage – You can put a smaller amount of money down for a lot more action. This can also cut against you and most options are not for the faint of heart with the price swings that occur in a given day.
- Use options to hedge against your long positions. Say you have 500 shares of SPY.. you can buy 5 puts to help cover your downside without putting up the price of 500 shares of SPY.
- This section has way too much info on it… books upon books of strategy including names that you would see in your biology book like condors and butterflies….so I’m just going to leave it where it is… and I can post more details on options another time.
This was a guest post by Nick Lewarne who runs the Naked Hedge Fund blog.
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