Is it better to short a stock or buy puts?
Best Answer
2172 points
ChaosNantuko answered 11 months ago …
It depends on your time horizon and outlook.
If you think this stock will go down in the long term (9 months+), then puts are better because you don't have to worry about being stopped out, and the time value decay on long term options is fairly low.
If you think the stock will go down in the medium term(2-9 months), i'd consider shorting because while you may be stopped out, you don't lose time value as you wait for the stock to move downwards.
If you think the stock will go down in the short term(a week - 2 months), i'd once again use puts because short term moves are usually smaller, and you get more leverage with puts. Also, due to the short time horizon, losing time value on the option isn't extremely significant because you will be in and out quickly.
If your day trading, I'd use stock though because you really need to have tight stops, and the options may be a tad to pricey compared to the amount you want to risk. you also need to be in and out quickly, so you may or may not have the time to decide on factors such as strike price.
Answers
283 points
ChuckF answered 11 months ago …
I'd say to buy puts. Reason being, with puts your downside is limited to the cost of the put options. But if you short a stock then you have unlimited downside (the price could theoretically go up forever). Upside is essentially the same...so yeah, for me puts would be the way to go.
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3970 points
EthanR answered 11 months ago …
I disagree with Chuck F. If you go to the blog section on this site, and scroll down with the more button, you will see the article that Chaos Nantuko and I wrote about A System for Shorting Stocks, in which we use fairly tight stop losses on the upside when shorting. Yes, a stock could go to infinity, but in reality ver few ever do, and if you use stop losses, who cares? I am not putting down puts (no pun intended), I am just saying that there are many methods of shorting that work very well.
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251 points
MichaelShulman answered 11 months ago …
Overall, I prefer using puts to play the short side of a stock because they are less risky, offer more leverage and are fairly inexpensive.
The reasons to steer clear of outright shorting are vast, and if you'd like to read all of my thoughts on the subject, you can find them here: http://www.optionszone.com/learn-more/michael-shulman/issues-with-shorting -stocks-how-to-buy-puts.html
427 points
larryat36 answered 11 months ago …
Unless you already own the stock, definitely puts. It is never a good situation to be short without any protection or hedging in place.
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952 points
rvilmur answered 11 months ago …
I would definitely go with the Puts. Go in the money (with a delta of 0.8 or greater) and with enough time to meet your expectation of the time needed for the stock to drop. Just don't over leverage your position. Take profits when the stock hits a support point. Conversely buy the Puts when the stock is at a resistance point.
If you understand buying calls, buying puts is really the same; but your expectation is for the stock to drop instead of rise. As with calls, if the implied volatility is too high relative to historical implied volatility for the stock, you have too many people with the same idea and the puts will be expensive and the risk will rise.
