How to Short the Stock Market
20:50 UTC 24 Mar 2009 
2 Comments
This is the number one question I get all the time once people hear that the
past2 years have been the best trading years I have ever had. I get the look of “um yeah your full of s$%#” so I have to show them. Shorting stocks is not hard and yes there is risk, but how risky has it been going long the past year or so? And a plus of the downside is that stocks go down a lot faster than they go up. For instance in March we erased all of the gains from 1996-2007 (11 Years) in the matter of 1 year and 5 months.
I’m going to keep these 3 ways very concise and open for discussion. Easiest to complicated:
1. Buy inverse ETFs. Advantages:
- These have the same great characteristics of ETFs and you can purchase them just like any other stock or ETF throughout the trading day.
- There are even inverse ETFs that are double or triple leveraged, which means as an example if the S&P500 goes down 2% on a given day and you owned SDS (double short S&P) you would make 4%.
- Another great advantage of investing in inverse ETFs is that you can buy these even if you cannot have a margin account, such as in your tax-deferred savings accounts (401(k), 403b or IRA)
Here is a link to the Proshares list of inverse ETFs they cover every sector that you can imagine: Proshares
2. Short stocks straight up. This requires a margin account. The pluses are:
- You don’t get any price nuances, which happens sometimes in the inverse ETFs, where an inverse fund isn’t exactly performing as well as if you shorted directly.
- Still very easy to do using most online broker consoles instead of selecting “buy” a stock select “short”
3. Options. This requires the ability to trade options with your broker, which usually means some extra forms to fill out. Advantages:
- Leverage – You can put a smaller amount of money down for a lot more action. This can also cut against you and most options are not for the faint of heart with the price swings that occur in a given day.
- Use options to hedge against your long positions. Say you have 500 shares of SPY.. you can buy 5 covered puts to help cover your downside without putting up the price of 500 shares of SPY.
- This section has way too much info on it… books upon books of strategy including names that you would see in your biology book like condors and butterflies….so I’m just going to leave it where it is… and I can post more details on options another time.
(5 votes, average: 4.80 out of 5)
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Nick,
I’m new to this side of the market, so forgive me if this is a remedial question, and I apologize if it has already been answered:
But as the market continues to dip, how do you rid yourself of all the short investments? Doesn’t demand for them seemingly go down, with the majority feeling that the market has bottomed out? Dollar Cost Averaging?
Anyway, great site, keep up the good work.
Steve O
Hey Steve,
Long time no talk… These are all very active and very liquid you “cover” or sell them (in the case of the inverse etfs) whenever you feel as though you should just like any stock you went long on. There is no problem of demand or lack of someone to be on the other side of the trade. This is another plus of stock trading compared to real estate… when you want out you can get out with a click of the mouse.
If you think that the market is bottoming out you can just start buying long positions in stocks. For example right now I have both sides covered by being long some stocks and short others that I have been short for a while.
Hope your doing well. And feel free to ask more questions.