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How To Use Put Options To Short Stocks


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Use Put Options To Short Stocks | An Overview

How To Use Put Options To Short StocksWhy do options traders use put options to short stocks instead of just shorting stocks outright?  There are many reasons to use put options to short stocks instead of actually shorting stocks.  The main reason is because establishing a short position in stocks via put options quantifies the risk of going short and the amount of money that can be lost from establishing a short position.  While the intent of establishing any trade is to make money, proper risk management is an important aspect of trading, and going short stocks via put options is an excellent way to manage risk when shorting stocks.  Shorting stocks via put options is especially useful and risk-adverse when the future direction of a stock appears negative and a trader sees it as a good money making opportunity on the short side because they think the stock is heading lower in price, but they want to protect themselves from unexpected upside surprises, such as a company buyout or a big contract award announcement.

An Example Regarding How To Use Put Options To Short Stocks

There are some really good examples regarding when to use put options to short stocks rather than borrowing stocks, selling them short, and holding them as short positions in a brokerage account.  The following is one of them.

Research in Motions (BBRY), which changed their name to Blackberry (their flagship smart-phone product), has defied skeptics and nearly tripled from lows set in 2012, when many thought the company may be heading for bankruptcy and liquidation.  The tripling of a troubled stock is a very tempting short, and many stock market participants are interested in shorting BBRY.  While it may be easier and more convenient to short BBRY outright by shorting the stock, shorting BBRY using short options is a far safer way to short BBRY.

Although, BBRY’s Blackberry is no longer the dominant smart phone, the company still garners interest from many areas in the technology industry and could be a takeover target for either their products, patents, or customer base.  A buyout of BBRY would be devastating to anyone who is short BBRY stock, especially if it turned into a bidding war and the stock kept moving higher.  However, going short BBRY via stock put options limits the upside risk and risk of monetary loss to the cost of buying the BBRY put options, which makes it a far safer way to short such a volatile stock.

Stock traders can also use put options to short stocks to free up trading capital for other purposes.  Since purchasing put options requires much less trading capital than establishing a short position in a stock, the money that is saved by establishing a short position via put options can be used elsewhere, either buying additional put options or balancing a trading portfolio with long positions.

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