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He's right about the shorting: to short it using futures is, in a way, to side yourself with potential ruin. Only through put options can you safely do this.

comboy 9y ago
Can you elaborate? Why shorting wouldn't work?
- dmm 9y ago
  A short has an unlimited downside. A put contract has a fixed downside, the price of the contract, which is paid regardless of whether you exercise the option or not.
  - imranq 9y ago
    However a put must have an underwriter who must take the risk that it goes to zero
    - pzs 9y ago
      True, yet the downside is still limited. The worst case for the option seller (or writer) is that she has to buy an asset valued at zero for the pre-agreed strike price. That puts a cap on her loss.
  - perseusprime11 9y ago
    Can you explain this further? Is a put contract essentially saying that this stock is not worth it and will lose its value in the next few months?
    - workthrowaway27 9y ago
      A put allows you to sell an asset at a certain price in the future. So, say I bought a put option with a strike price of 10k USD for bitcoin 5 years from now. If in 5 years the price of BTC is less than (10k - the price I paid for the put option) I can buy a BTC for whatever it currently costs, sell it at 10k to whoever took the other side of the option and make a profit. The risk is that if the price of BTC is above 10k, then I'm out the money the put option cost me.
      - perseusprime11 9y ago
        Interesting. Thanks for the example. Looks like Put option limits the risk so if bitcoin becomes 15K then I have to shell out 5K from my pocket.
        workthrowaway27 9y ago
        Actually, if bitcoin becomes 15k then you don't have to pay anything. The put option gives you the "option" to sell a bitcoin for 10k (in this example), but you're not required to do so. In practice you only sell it if you'll make a profit. So in the case where bitcoin is 15k after 5 years your put option is worthless and you've just lost whatever the put option cost when you bought it.
        perseusprime11 9y ago
        Is there any good literature that makes it easy to learn this aspect? How much does a put option cost typically?
- alextheparrot 9y ago
  The maximum liability a short exposes you to is infinite, whereas a put it is limited to the cost of the contract (Which in this case would probably be pretty high). Shorting technically would work, you’d just be placing a loaded, randomly firing gun against the roof of your mouth.
- dnautics 9y ago
  Short: borrow the asset, immediately resell, after price lowers, you rebuy the asset and keep the delta. You're hosed if it 10x, 100x, 1000x Option:. Purchase the right to sell the asset at a certain price & time. If the price is higher, then politely decline the option. The value of the option is zero, but you've already paid that upfront. Future:. Purchase a promise to sell an asset at a certain price & time. If the price is higher, you are still committed to make the sale. Safe if you hold the underlying asset in escrow until the strike date.
- ataturk 9y ago
  Because it is not the opposite of buying long. In the simple case, borrowing shares to sell hoping you can buy them back at a reduced price later puts you in a very dangerous situation when the market rises, which markets typically do over time. Unlike going long, directly shorting a stock is a bloodbath since you won't get the timing right unless you are the perpetrator of why the stock is going to fall. Using options to sell calls or buy puts is the alternative, but options are levered and so any tiny fluctuations blow you up. Options trading is referred to as "picking up pennies in front of a steamroller" for a reason. I did a lot of options trading in previous years. I had some big wins and some equally damaging losses and came out basically where I started, minus fees and oh yeah, the short term capital gains taxes, which eat up your profits like crazy. It's a waste of time because you are working against computerized trading bots that can front-run your orders on both the buy side and the sell side. Like I said before, you only think you know what the scam is. Big institutions that trade stocks use options as insurance, I don't think they make money on them unless they become a market maker or something. The guys in "The Big Short" who correctly predicted the housing bond market collapse nearly lost their asses because their investors were screaming at how bad the CDOs that were used to synthetically short the bond market were performing--they almost got the timing wrong. Then, after they were completely vindicated, they had a very hard time collecting on those CDOs at all. They finally did, of course, and the rest is history--massive bailouts of the bond markets, several dead companies including Bear Stearns and Wachovia, and so on.
- unknown_apostle 9y ago
  Because with borrowing or buying futures, your loss is potentially unlimited. So in practice you would rely on stop losses to avoid this. But in a crazy market like this, the stop losses could get triggered repeatedly and you'd get worn out. With buying puts or similar construction that involves optionality, if you can buy them at a nice price, you're not as dependent on the intermediate path taken by the price.

comboy 9y ago

Can you elaborate? Why shorting wouldn't work?

dmm 9y ago
A short has an unlimited downside. A put contract has a fixed downside, the price of the contract, which is paid regardless of whether you exercise the option or not.
- imranq 9y ago
  However a put must have an underwriter who must take the risk that it goes to zero
  - pzs 9y ago
    True, yet the downside is still limited. The worst case for the option seller (or writer) is that she has to buy an asset valued at zero for the pre-agreed strike price. That puts a cap on her loss.
- perseusprime11 9y ago
  Can you explain this further? Is a put contract essentially saying that this stock is not worth it and will lose its value in the next few months?
  - workthrowaway27 9y ago
    A put allows you to sell an asset at a certain price in the future. So, say I bought a put option with a strike price of 10k USD for bitcoin 5 years from now. If in 5 years the price of BTC is less than (10k - the price I paid for the put option) I can buy a BTC for whatever it currently costs, sell it at 10k to whoever took the other side of the option and make a profit. The risk is that if the price of BTC is above 10k, then I'm out the money the put option cost me.
    - perseusprime11 9y ago
      Interesting. Thanks for the example. Looks like Put option limits the risk so if bitcoin becomes 15K then I have to shell out 5K from my pocket.
      - workthrowaway27 9y ago
        Actually, if bitcoin becomes 15k then you don't have to pay anything. The put option gives you the "option" to sell a bitcoin for 10k (in this example), but you're not required to do so. In practice you only sell it if you'll make a profit. So in the case where bitcoin is 15k after 5 years your put option is worthless and you've just lost whatever the put option cost when you bought it.
        perseusprime11 9y ago
        Is there any good literature that makes it easy to learn this aspect? How much does a put option cost typically?
alextheparrot 9y ago
The maximum liability a short exposes you to is infinite, whereas a put it is limited to the cost of the contract (Which in this case would probably be pretty high). Shorting technically would work, you’d just be placing a loaded, randomly firing gun against the roof of your mouth.
dnautics 9y ago
Short: borrow the asset, immediately resell, after price lowers, you rebuy the asset and keep the delta. You're hosed if it 10x, 100x, 1000x Option:. Purchase the right to sell the asset at a certain price & time. If the price is higher, then politely decline the option. The value of the option is zero, but you've already paid that upfront. Future:. Purchase a promise to sell an asset at a certain price & time. If the price is higher, you are still committed to make the sale. Safe if you hold the underlying asset in escrow until the strike date.
ataturk 9y ago
Because it is not the opposite of buying long. In the simple case, borrowing shares to sell hoping you can buy them back at a reduced price later puts you in a very dangerous situation when the market rises, which markets typically do over time. Unlike going long, directly shorting a stock is a bloodbath since you won't get the timing right unless you are the perpetrator of why the stock is going to fall. Using options to sell calls or buy puts is the alternative, but options are levered and so any tiny fluctuations blow you up. Options trading is referred to as "picking up pennies in front of a steamroller" for a reason. I did a lot of options trading in previous years. I had some big wins and some equally damaging losses and came out basically where I started, minus fees and oh yeah, the short term capital gains taxes, which eat up your profits like crazy. It's a waste of time because you are working against computerized trading bots that can front-run your orders on both the buy side and the sell side. Like I said before, you only think you know what the scam is. Big institutions that trade stocks use options as insurance, I don't think they make money on them unless they become a market maker or something. The guys in "The Big Short" who correctly predicted the housing bond market collapse nearly lost their asses because their investors were screaming at how bad the CDOs that were used to synthetically short the bond market were performing--they almost got the timing wrong. Then, after they were completely vindicated, they had a very hard time collecting on those CDOs at all. They finally did, of course, and the rest is history--massive bailouts of the bond markets, several dead companies including Bear Stearns and Wachovia, and so on.
unknown_apostle 9y ago
Because with borrowing or buying futures, your loss is potentially unlimited. So in practice you would rely on stop losses to avoid this. But in a crazy market like this, the stop losses could get triggered repeatedly and you'd get worn out. With buying puts or similar construction that involves optionality, if you can buy them at a nice price, you're not as dependent on the intermediate path taken by the price.