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...

An Example of Buying a Put Instead of Short Selling


Let’s say you’re bearish on a stock that’s currently trading at $70. You could buy a 70-strike put with no special rules or margin considerations to worry about. The stock drops below $70 as you predicted, let’s say to $60...

You might profit in one of two possible ways:

1. Buy the stock in the marketplace at $60, and then exercise your put. This would sell the stock at $70. These two actions would secure the difference of $10 per share, less total costs of $20.50 (commissions of $10.55 and an exercise fee of $9.95), or

2. Simply sell the put in the open market - it should be trading at a higher price than you paid to purchase it because of the downward stock move.

Of course, if the stock doesn’t drop as predicted or trades higher, you could lose the entire value of the put option - but that’s all you can lose. If the stock heads upwards, you have the right, not the obligation, to exercise and sell at $70; if you choose not to exercise your right, that’s fine too. If you no longer have a bearish opinion on the stock, you also have the right to sell your long put before you lose the entire value of your investment. Exiting your put position before it expires worthless allows you to further minimize potential losses.

What are the risks in using puts as an alternative to short selling?

Long puts as an alternative to short selling carry the same risk of any other put purchase: If the stock stays above the strike price, you can lose the entire premium upon expiration. But again, that’s the maximum amount you can lose, so your risk is capped.

If you’re thinking of short selling stocks, put buying may offer a logistically simpler, lower-cost way of acting on your bearish sentiment.

JOIN TRADEKING AND GET $1,000 IN FREE TRADE COMMISSION!

Trade commission free when you fund a new account with $5,000 or more. Use promo code FREE1000. Take advantage of low costs, highly rated service and award-winning platform.
Get started today!






Related Strategies

218 Long Put Image
Long Put A long put gives you the right to sell the underlying stock at strike price A. If there were no such thing as puts, the only way to benefit from a downward movement in the market would be to short...

Protective Put Node 214
Protective Put Purchasing a protective put gives you the right to sell stock you already own at a specified price. Protective puts are handy when your outlook is bullish but you want to protect the value of stocks...

395 Diagonal Spread w/ Calls Image
Diagonal Spread with Calls You can think of this as a two-step strategy. It’s a cross between a long calendar call spread and a short call spread. It starts out as a time decay play. Then once you sell a second call with...

More strategies...

All-Star Analysis

Which account types are automatically deemed professional by the exchanges? on 05/19/2016
Certain legal entity accounts are automatically considered Professional. These account types include, but are not limited to, the following...

ETF Center | Trading Tools on 03/25/2013
Tap into the latest market activity in exchange-traded funds (ETFs), including most-actives, top performers and more.

404 Christmas Tree Butterfly w/ Calls Image on 12/16/2010

More analysis...

On-Demand Videos

How to trade a hot-issue IPO at TradeKing

IPOs offer potential profits as well as possible risk. Join Nicole Wachs as she explains...


Options Pricing Calculator Video Tutorial

Our Options Pricing Calculator makes researching a contract's...


Volatility: A Practical Talk

Join Dan Sheridan as he discusses implied volatility and the Greek Vega. After the discussion Dan applies the...


More videos...