4 ms·

I'm not sure that's necessarily meaningful. Sure, you pay for optionality in a put as opposed to a short, but it may be easier and cheaper to buy a put than fin

by bko 5y ago

I'm not sure that's necessarily meaningful. Sure, you pay for optionality in a put as opposed to a short, but it may be easier and cheaper to buy a put than finance a short if you believe the stock will go down. The downside isn't unlimited if you short, since I don't think you'd be on the hook if you hit a margin call, your collateral would simply be seized and your position would be exited. I'm sure there's other intricacies in short vs buy a put, but I don't think you can infer too much from the choice without knowing a lot more. I think all you could say is that he's bearish on the stock in the short term. I could be wrong though so I would love to hear other interpretations or whether there's some liability apart from your margin in a naked short.

incrudible 5y ago
It's a very meaningful distinction. If you have a put option, the stock can go to the moon and back multiple times, and you can still end up in the money on the strike date. If you have a short position, you're going to get margin called on the way to the moon and it's "game over".
- arcticbull 5y ago
  True, but if it doesn't go anywhere you lose it all with a put, and lose far less with a short (just the borrow fee).
  - Kranar 5y ago
    In other words, a short and a put are not remotely the same things and are meaningfully distinct from one another.
    - arcticbull 5y ago
      I certainly agree their risk-reward profiles are materially different. They're similar in that they are both bearish positions.
deleted 5y ago
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arcticbull 5y ago
With a put option, you pay premium in the form of "theta decay" over time. If Tesla stays flat, you lose your entire premium, and on a stock like TSLA with high implied volatility, that can be a very expensive proposition. Similarly, with a short position, you'll be paying a borrow fee which will vary over time based on short interest.
- AlanSE 5y ago
  Fascinating subject. I also just want to mention why it makes sense that people SELL put options, in addition to buying them. If you sell a put option, then you have the obligation to sell in the future at the fixed price, regardless of the market price at the time. However, many of these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options. So if the stock goes above the strike price, they have the option of selling the shares the already own. Thus, the seller is not on the hook for infinite losses. They merely trade the potential for unlimited gains in return for a fee. I've always thought it would be fun to get into options by regular, automated, selling of covered put options. You get paid by speculators for underwriting their speculating. But... options pricing models are like real academic. It's like a real job.
  - arcticbull 5y ago
    That's when you sell a covered call. When you sell a put, your obligation is to pay the strike to buy someone else's shares. For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts. A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.
ska 5y ago
re: liability. Surely your liability is to the shares you borrowed, not the fraction your account has to meet margin requirements? If not, why would a broker ever let you short on a margin account under the same rules as other margin?

by bko 5y ago

incrudible 5y ago

It's a very meaningful distinction. If you have a put option, the stock can go to the moon and back multiple times, and you can still end up in the money on the strike date. If you have a short position, you're going to get margin called on the way to the moon and it's "game over".

arcticbull 5y ago
True, but if it doesn't go anywhere you lose it all with a put, and lose far less with a short (just the borrow fee).
- Kranar 5y ago
  In other words, a short and a put are not remotely the same things and are meaningfully distinct from one another.
  - arcticbull 5y ago
    I certainly agree their risk-reward profiles are materially different. They're similar in that they are both bearish positions.

deleted 5y ago

[deleted]

arcticbull 5y ago

With a put option, you pay premium in the form of "theta decay" over time. If Tesla stays flat, you lose your entire premium, and on a stock like TSLA with high implied volatility, that can be a very expensive proposition. Similarly, with a short position, you'll be paying a borrow fee which will vary over time based on short interest.

AlanSE 5y ago
Fascinating subject. I also just want to mention why it makes sense that people SELL put options, in addition to buying them. If you sell a put option, then you have the obligation to sell in the future at the fixed price, regardless of the market price at the time. However, many of these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options. So if the stock goes above the strike price, they have the option of selling the shares the already own. Thus, the seller is not on the hook for infinite losses. They merely trade the potential for unlimited gains in return for a fee. I've always thought it would be fun to get into options by regular, automated, selling of covered put options. You get paid by speculators for underwriting their speculating. But... options pricing models are like real academic. It's like a real job.
- arcticbull 5y ago
  That's when you sell a covered call. When you sell a put, your obligation is to pay the strike to buy someone else's shares. For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts. A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.

ska 5y ago

re: liability. Surely your liability is to the shares you borrowed, not the fraction your account has to meet margin requirements? If not, why would a broker ever let you short on a margin account under the same rules as other margin?