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Shorting individual stocks

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Zaxon

The voice of reason
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I'd like to summarize the ways of making money on individual shares during price declines. In the perfect world, it would be like a stock: can hold indefinitely; costs you nothing to hold it; can buy small and medium caps. I'm presuming no such thing exists for shorting, but as close to my wish list as possible.

Options I know of are:
  • Directly shorting the stock
  • Shorting CFDs of the stock
  • Shorting Futures of the stock
  • Buying Put Options
If there are other viable options, please list them.

I'd like for you guys who preferably have a good knowledge of these options, to rank them on the following criteria.

Scenario: You have $10k to short a stock. You want the option to hold that short for a year. You can easily buy in or sell at any time, so good liquidity. Ideally, you have the option of shorting a medium (or small cap), but I understand I mighn't get that wish. You're not wanting to leverage this any more than you have to. This isn't a hedge against an existing stock.

What I'd like to know is:
  1. Which of the methods above allows this or comes closest?
  2. Which methods are the lowest cost? What would the approximate cost be for each method?
  3. Which methods are the safest: low counterparty risk, broker not artificially manipulating the market (eg: CFDs)
  4. Which methods are safer by limiting the amount of money you could lose if the stock goes up in price? (For instance, buying puts you only risk your initial fee.)
  5. Relative ease of use for someone new to the instrument. As much as possible, your existing knowledge of how to invest in shares should be relevant to this security
  6. Liquidity. How easy is to get in and out of these positions?
  7. What "universe of shares" does each method give me? Am I limited to just the 86 stocks that broker has chosen?
  8. Can I short small caps with this method?
I'll contribute what I know:
  • Directly shorting the stock requires you to pay any owed dividend, so mightn't be a good idea for a long term hold
  • Puts and Futures have expiry dates.
  • Puts are relatively safe, since the most you can lose is the down payment.
  • Options market doesn't have good liquidity in Australia
  • I've heard all good derivative traders eventually move to futures. I don't know if this is true.
  • CFDs seem to have a lot of on going borrowing fees.
  • With stock shorting, you're limited to the actual shares the broker has access to
If people with broad experience across these options can identify the best method that satisfies my objective, and preferably flesh out the details.
 
One more to your list Zax, is warrants. It's bit like an options put but I find it a little easier to find the warrant for the liquid large caps on the ASX that can make you money betting against the stock i.e. if the price of the stock falls. See below for some of the BHP call & put warrants:



You can find the warrants on the ASX and then trade the put you like using your stock broker, ASX link below:
https://www.asx.com.au/asx/markets/warrantPrices.do?by=underlyingAsxCode&underlyingCode=BHP

No need for fancy-pants CFD's etc which could play with market prices etc.
 
aus_trader said:
One more to your list Zax, is warrants. It's bit like an options put but I find it a little easier to find the warrant for the liquid large caps on the ASX that can make you money betting against the stock i.e. if the price of the stock falls.
Click to expand...
Very interesting. So for a put warrant, you'd buy it with the exercise price of the current underlying share today, and if the market goes down, you buy the actual share and then execute the put (sell) of the share?

So you think warrants are more liquid than the equivalent option for ASX shares? And what's the relative price of buying options vs warrants? I read that to exercise the warrant, you need to contact the issuer directly, so not your broker. Is that correct? Is that difficult?
 
One point to add to my original post, I'll be using this security type for ASX shares, so it must work well here at home and have plenty of liquidity. If it also can be used in other markets, that's an added bonus.
 
Actually warrants are much easier and cheaper (in terms of brokerage costs).

With warrants you just buy the appropriate put with your broker just like buying a share. The behavior is like an option i.e. the puts closer to the current market price of the stock will vary wildly and can become worthless if it goes against you i.e. the stock rises sharply. On the other hand a put at a much higher price will increase in value as the underlying stock drops and you can still sell the put (as it will have some value) if the stock goes up to a set Stop Loss you have in mind.

I also considered Options before deciding on warrants for any shorting trades. Option brokerage costs are ridiculous in Australia so I will wait till some day when they come down to prices similar to stock broking costs.
 
Zaxon said:
One point to add to my original post, I'll be using this security type for ASX shares, so it must work well here at home and have plenty of liquidity. If it also can be used in other markets, that's an added bonus.
Click to expand...
Warrants work here on ASX, I can confirm as I have used warrants to bet against stocks. Only available for the large cap liquid stocks though. No warrants listed for small cap speculative plays.
 

Very interesting. In my experience with options, you phone your broker. How do you execute a warrant?

I've checked my broker's prices. $9-11 to buy warrants (same as shares). $33 to buy options. Not sure how much the relative exercising prices are.

aus_trader said:
Warrants work here on ASX, I can confirm as I have used warrants to bet against stocks. Only available for the large cap liquid stocks though. No warrants listed for small cap speculative plays.
Click to expand...
I fear that will be the case with all the instruments. If so, I shall learn to live with it
 
That's what I was talking about. 3 to 4 times more for options brokerage.

To execute a warrant you just buy the warrant, say a put warrant if you believe the underlying stock (say BHP) is going to go lower. Then the put will increase in value if the if PHP trades lower or the put will decrease in value until the exercise price if BHP rallies. If BHP rallies above the put's exercise price then your put will be worthless.

I rarely wait for the warrant till expiry date, I'll sell it to lock in profits or to limit losses if it goes against me.
 
While I'm waiting on experts in these relative areas to contribute, I'll start adding some facts so we can move part of the way there.

Can lose more than original money
  • CFDs
  • shorting stock
  • put futures
Can't lose more than original money
  • put options
  • put warrants
 
I've done some reading on futures, including on ASF. It seems that futures are primarily used for trading indices, not individual stocks. And it's suggested that you pick one index and stick with it to get to know it.

If this is the case, then futures don't appear to meet my requirement of shorting individual stocks.
 
I believe so, futures, e-mini's etc are used for indexes. People use them for hedging a portfolio of long stocks during market downturns and bear markets but as far as I know futures can't be used for shorting individual stocks.

Can futures be used for sectors? Say for Material sector or Financial sector? I wander if there are other members who are expert futures traders who'll know the answer.
 
aus_trader said:
Can futures be used for sectors? Say for Material sector or Financial sector? I wander if there are other members who are expert futures traders who'll know the answer.
Click to expand...
A limited number of sectors only, it appears.

 
My preferred method would be exchange traded options !

Work out how many short deltas you wanna be.

Executed as a combination order, short the call and buy the put at the same strike, best done with at the money strikes.

ASX options on our top stocks have fairly good liquidity.

Happy shorting !!
 
cutz said:
My preferred method would be exchange traded options !
Executed as a combination order, short the call and buy the put at the same strike, best done with at the money strikes.
Click to expand...
So current price is $10. You buy $10 puts and sell $10 calls.
  • If price goes to $5. You can buy the shares at $5 and then instantly sell them at $10. Calls expire worthless but you've received a premium for selling them. Good deal.
  • If price goes to $20. Your puts expire worthless. Someone demands shares from you at $10. So hopefully you own those shares. Bad deal.
cutz said:
ASX options on our top stocks have fairly good liquidity.
Click to expand...
That's good to know.
 

No !

You would reverse the position by selling the put and buying the call executed as a combination order.

The first and second trades cancel each other out so you will now be flat plus trading profits, ( losses if stock goes up).

The position will be delta one so it will move in step with the underlying.
 
Last edited:
cutz said:
No !

You would reverse the position by selling the put and buying the call executed as a combination order.

The first and second trades cancel each other out so you will now be flat plus trading profits, ( losses if stock goes up).
Click to expand...
OK. So you're not carrying the shares at all. If the market goes up to $20, you write $20 puts and buy $20 calls? Or at the original $10 price?

And if the market goes down, do you ever wait to exercise the puts, or do you sell the put before the exercise date?
 
I've phoned my broker. The info he's given me is:
Exercising Options: phone the broker. Cost is normal brokerage + 5.5c per contract ASX fee
Exercising Warrants: phone the market maker, so Citibank, UBF, Westpac. Unknown exercising fee.

So if you're ever going to hold the derivative to the exercising date, options are much simpler.

Also, options are standardized by the exchange, so you know the format already. Apparently, warrants can vary in conditions according to the company's needs, so they're not standardized. I don't know if you're only buying put warrants (so not installment etc), how much variation exists between say BHP and CSL warrants, or if they're essentially standardized in practice.
 
Zaxon said:
And if the market goes down, do you ever wait to exercise the puts, or do you sell the put before the exercise date?
Click to expand...

The whole point of the exercise is you're creating a synthetic position using options, the synthetic short will mimic the stock in terms of profit/loss profile, buying the stock to exercise the put introduces another set of complications, no need to do so, just close out the position with a synthetic long equivalent.

Easy Peasy !

BTW just read your last post, not sure about the point of warrants, perhaps someone can enlighten me ! If it's not exchange traded I wouldn't bother...
 
OK. Wouldn't you be better off just buying the put initially? If the market goes down, you can sell it again to profit. If the market goes up, it expires worthless. With the synthetic short, if the market goes up, you've made a loss relative to that price increase.
 
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