>>What do most of the people on this thread (and others I'm sure) mean when they say "shorting".
If I may elaborate on the answer of a couple of my Esteemed Colleagues...
When someone says thay are "short" or "shorting" they usually mean one of three things:
1. The have sold the shares of a stock that they do not own with the intention (requirement) of replacing them at a later date. Hopefully, they will acquire the replacement shares at a price lower than they sold them.
You do not own any XYZ, and you think it will go down. You sell 100 shares of XYZ for $20. To do this, your broker will arrange to "borrow" them from someone else's brokerage account. At some point, you must replace them. The price goes down to $15, and you repurchase the shares to close your short position, and have profited by the spread , or $500 (100 x $5). Generally, you must satisfy margin requirements when short by either having adequate cash in your margin account, or paying margin interest during the duration of the short period. These is no practical limit on the period you can be short in this manner.
2. They have bought puts, which give them the option to make someone else purchase 100 shares per contract at any time up to the expiration date for a pre-determined price (the strike).
XYZ is trading at $50. There is a Put option available that expires in December with a strike of $45. The price of the option is $2 ($200 per 100 share contract), which gives you the right to make the option writer purchase the shares from you for $45. You would never exercise the option unless the price of XYZ drops below $45. You do not have to own XYZ to buy the the option. If the stock drops to $40, you buy them and make the option writer buy them from you for $45. Your profit is $3 per share, because you paid $2 for the option.
3. They have written calls, which gives someone else the right to purchase 100 shares per contract at any time up to the expiration date for a pre-determined price (the strike).
You own 100 shares of XYZ which trades for $50. Someone buys a call option for you and pays you $2 ($200) for the right to purchase 100 shares for you at any time up to the expiration date for $55. (This is called writing a covered call.)They would never exercise unless the price of XYZ exceeds $55. In this case, if your shares get called away, you have effectively sold them for $57 ($55 + $2) when the shares were trading for $50. It doesn't matter if XYZ trades for $75 when the shares get called away - you still are paid $55. However, if XYZ drops in price, the call is never exercised, you keep your shares and keep the $2 premium that you collected when you write the contract.
Obviously, these scenarios are over-simplified and there are many, many variables and techniques. Most options are liquidated prior to expiration, and are used as either a hedge against long and short positions in a stock, or as a way to leverage the price movement in a stock. It is very risky, and should only be done with a good understanding of the risks involved.
Oops. Out of time - got to run 'til later. Hope I got it right. |
