Learn trading ideas & strategies from TradeKing's experts

Upcoming Live Events
More live events...
Learn it. Trade it.

Open your TradeKing account today!

Upcoming Live Events
More live events...

Buying Puts as an Alternative to Short-Selling


If you’re bearish on a stock, you can try to capitalize on this view in a few ways:

1. Sell the stock, if you own it.

2. Sell the stock, even if you don’t own it, by borrowing shares via your brokerage firm. Then, at a later date, buy the shares (hopefully at a lower price) to pay back your broker. That’s called "short-selling".

3. Or you can buy a put option, which gives you the right to sell stock at a given price for a pre-determined timeframe.

Why buy a put instead of selling short?

Short-selling can be tough. Short-sellers must contend with margin requirements and special rules about when they can or can’t place a short sale. Margin is essentially a line of credit for trading stock, for which you make a minimum down payment and pay your broker an interest rate. If the market moves against you suddenly, you may be required to quickly add to this down payment in what’s termed a “margin call”. Read up on the risks of margin to use this tool wisely.

If you’re wrong about your bearish outlook and the stock starts to rise, your risks climb considerably, too. You must deliver those shares of stock to the brokerage firm. Since there’s no limit on how high a stock price can climb, buying them when they’re on the rise means there’s theoretically no limit on your risk. Plus, you’ll continue paying interest on the margin balance until the position is closed.

Buying a put can offer a relatively low-cost, hassle-free alternative to short selling for bearish investors.






Related Strategies

418 Front Spread w/ Puts
Front Spread with Puts Buying the put gives you the right to sell stock at strike price B. Selling the two puts gives you the obligation to buy stock at strike price A if the options are assigned. This strategy enables you...

403 Inverse Skip Strike Butterfly w/ Puts image
Inverse Skip Strike Butterfly with Puts You can think of this strategy as a put backspread with a twist. Instead of simply running a back spread with puts (sell one put, buy two puts), selling the extra put at strike A helps to reduce the...

415 Long Combination Image
Long Combination This strategy is often referred to as “synthetic long stock” because the risk / reward profile is nearly identical to long stock. Furthermore, if you remain in this position until...

More strategies...

All-Star Analysis

TradeKing is Expanding in Charlotte on 04/21/2015
As the TV jingle goes, “we’re moving on up” with our brand-new, gorgeous office space in Charlotte. We moved in just a few weeks ago, and...

TradeKing Midday Market Call Recap - $SPX & $TGT on 05/19/2015
Featuring @BrianOverby and @MNKahn   Analysis of S&P 500 from Michael Kahn with QuickTakesPro:S&P 500 (SPX) – Sitting around 2129....

Doubles - Not As Easy As It Might Seem on 12/17/2013
Alan Brochstein Analyzes Some Leading Performers in 2013This is the time of year when trading activity typically begins to slow but...

More analysis...

On-Demand Videos

Probability Calculator Tutorial Series
Part 3: Setting Target Prices

Our Probability Calculator can help you estimate your probability of success for any options strategy. Just pick...


Spreads: An Alternative to Covered Calls

Do you want to sell covered calls, but use less capital? Brian Overby explains how to use a long call bull spread as...


Probability Calculator Tutorial Series
Part 4: Introduction to Standard Deviation

Our Probability Calculator can help you estimate your probability of success for any options strategy. Just pick...


More videos...