Derek,
I agree that a put is a safer way to "short" a stock. The fact is that your downside is the premium that you paid to buy the put, plus your commission. You can lose the entire premium, theoretically, but that is it. With a short, the downside is unlimited, as the stock could easily run up & up, and until you cover the short, your losses increase point for point as the stock trades higher.
In a situation where you want a position in a stock, but are unsure of whether or not it will run or tank (an earnings play, for example), you may want to short against the box. If the stock runs up, you can cover your short, carry your long. If the stock tanks, sell the long, carry the short down, then cover. In the meantime, your loss is limited to the difference between the short & long positions as long as you play the box. Naturally, as long as you play the box, you will not make money, just defer your gain or loss until you sell the long or cover the short. This is why this technique can be useful tax-wise, to lock in a gain that you do not want to take until the following tax year.
As far as being approved for options trades, I believe that your broker is not unique. Options do carry great risks, particularly the selling of puts. You must have adequate means to pay for the stock if you get put to. If you are talking about writing calls, I can see how you are upset that you cannot do so on your income, as it is a nice way to generate cash on shares that you want to hold, or are willing to sell at a particular strike, for a profit. Yet, you could wind up holding some shares of a stock that's tanking, and when you uncover to sell at market, you may find that the initial premium that you received was not worth the loss at current market value, if the stock's value decreased substantially since you sold the call. So, you may have lost lots of capital in order to get a small premium, and thus, the risk in the selling the call. Could you tolerate this loss? This is what your broker is saying, I suspect.
I know that many electronic trading companies are less stringent on who can play options, so you may want to check them out. I don't know which ones in particular, but have seen references in the thread, and in advertisements, you will have to call around.
Wishing you luck in your investments!
Vicki |
