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

406 Long Condor w/ Calls Image
Long Condor Spread with Calls You can think of a long condor spread with calls as simultaneously running an in-the-money bull (or long) call spread and an out-of-the-money bear (or short) call spread. Ideally, you want the short...

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...

219 Fig Leaf Image
Fig Leaf This strategy acts like a covered call but uses a LEAPS call as a surrogate for owning the stock. Though the two plays are similar, managing options with two different expiration dates makes a...

More strategies...

All-Star Analysis

189 Using puts instead of short selling image on 12/22/2010

First-in, first out on 05/16/2011
when a security position from a pool of similar positions is closed, that position first established is considered closed first for...

TradeKing Streaming Quotes | Market Research Overview on 08/13/2010
div.secondary_content{ background:none; } div.styleguided h2 { font-family: 'montserratmod-bold'; font-size: 18px; color: #333; letter...

More analysis...

On-Demand Videos

34243 Choose Your Strategy part 3 image 154x116.png
How to Choose Your Strategy, part 3: Aligning Your Outlook with the Greeks

Sit in with Nicole Wachs as she dispenses common-sense explanations of the Greeks during the third meeting of her...


18198 Traders Lingo part 1 154x116 image.png
Trader's Lingo, part 1: Stocks

Understanding the unique terminology associated with trading is one of the first hurdles a new investor must...


495 Which Option to Buy, part 2 (obp 5)
Which Option to Buy, part 2

In this 5th installment of his ongoing Option Playbook series, Brian Overby continues his discussion of how to...


More videos...