Cuemaster,
The chief differences between shorting a stock and buying an equivalent number of puts are:
1. You must pay a time premium for the puts. Even if they are well in the money, you will pay a small time premium, as well as the exagerated bid/ask spread inherrent in trading the less-liquid and nominally-cheaper derivative instruments.
2. Options have expiration dates. Even if you are right about the direction of a stock, you could lose all your money because of a miscalculation of just a few days. Literally. Shorting allows you the luxury of pursuing the "sell and hold" strategy, provided you have the margin reserves necessary to withstand the fluctuations.
3. The purchase of options limits your maximum loss to the amount invested. Selling stock short leaves you vulnerable to a greater (theoretically unlimited) loss.
4. Short stock can be "called in" by your broker (uncommon, but possible,) thus closing out your position prematurely, and against your wishes. Options are yours until you sell them, exercize them, or they expire, whichever comes first.
5. Options allow you to leverage your position, sometimes very greatly. Thus, if you are right (*very* right,) you could win big (several hundred, or even thousand, percent.) Note: doing this is mathematically possible, but highly unlikely.
6. Options strategies are many and varied: various spreads, straddles, strangles, hedges, etc. Selling short, by contrast, is much more straight-forward.
7. Buyers of "premium" are usually losers. This is not simply my observation: there are statistics on this phenomenon, and they are not encouraging to the prospective option buyer.
8. Stock may not always be available to short, but an arbitrarily large number of put contracts can be "written" at any given strike.
As a general rule of thumb, if you are undecided between selling a stock short and going long its puts, keep in mind that buying the puts is safer (less "downside" variance,) but also less efficatious (lower expected value of return.)
There are many books and reference materials available. Rather than post vague information on them ("the mind is the first thing to go," they say,) I will let someone else provide suitable titles and/or links.
I hope this helps. Good luck,
RB |
