6 ms·
Why are shorts necessary in the presence of put contracts? I think the problem some folks have with short selling is that it creates for the market an illusion
by sk5t 7y ago
Why are shorts necessary in the presence of put contracts?
I think the problem some folks have with short selling is that it creates for the market an illusion of willing sellers where there may not be supply.
- rahimnathwani 7y agoIt's analogous to the reason coal was necessary even after we had electricity: short positions enable the production of put contracts. By selling you a put option, I'm taking a long position on the underlying stock. So I probably want to hedge that by selling a bit of my existing stock. But if I don't already own stock in that company then, without short selling, I can't provide that liquidity. Short selling typically involves the sale of borrowed stock, mediated through dealer-brokers, so the stock that's sold short does exist. So there's no issue with supply.