Shorting individual stocks

[cutz]

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.

Yeah a buy put looks good on paper.

Initial discussion was shorting the stock hence my idea of a synthetic short using options, pure delta play.. A buy to open put will not give you the delta you are chasing unless you're WTFITM, or at the money but bigger size where time decay will eat away at your position.

 

[aus_trader]

A limited number of sectors only, it appears.

View attachment 94634

Interesting, I didn't know even a limited number of sectors were available. Thanks Zaxon, where did you come across this type of information ? I don't actually trade futures, except I do have some indices listed with a Forex broker.

 

[Zaxon]

Thanks Zaxon, where did you come across this type of information ? I don't actually trade futures, except I do have some indices listed with a Forex broker.

https://www.asx.com.au/prices/asx-futures.htm

There's also futures for interest rates: bond yields, bank bills, etc. Commodities such as Wheat, barely, electricity, gas, etc.

 

[aus_trader]

https://www.asx.com.au/prices/asx-futures.htm

There's also futures for interest rates: bond yields, bank bills, etc. Commodities such as Wheat, barely, electricity, gas, etc.

OK thanks, Just have to find which brokers offer these instruments to retail investors/traders like us...

 

[aus_trader]

Hi Zaxon,

The link below will probably answer your questions in relation to Warrants listed on the ASX.

Warrants FAQs - ASX

Cheers,
Rob

Thanks rnr, yes ASX warrants are not some broker manufactured instrument like CFD's offered by market makers. The warrant prices can be checked on the ASX website.

 

[Zaxon]

So we cover all our bases, with CFDs, in addition to your counterparty typically being your broker and all the games that entails, there are holding fees for holding CFDs overnight. I'd imagine if you wanted to hold CFDs for a year, it would be crazy exercise.


Plus, you're required to hold a decent cash balance at all times and add more money whenever they demand it.



When we compare that to options and warrants, nobody is going to demand more money. You only pay if you choose to exercise/buy/sell, which is under your control.

However, the value of options & warrants do decay over time, so they're not perfect instruments either.

 

[aus_trader]

So we cover all our bases, with CFDs, in addition to your counterparty typically being your broker and all the games that entails, there are holding fees for holding CFDs overnight. I'd imagine if you wanted to hold CFDs for a year, it would be crazy exercise.

View attachment 94639
Plus, you're required to hold a decent cash balance at all times and add more money whenever they demand it.

View attachment 94640

When we compare that to options and warrants, nobody is going to demand more money. You only pay if you choose to exercise/buy/sell, which is under your control.

However, the value of options & warrants do decay over time, so they're not perfect instruments either.

Yes, you've summarised the use of these instruments well.

Neither of them should be used for long term investing type of use. Especially Options and warrants decay in time and lose value at an increased rate as it approaches expiry, so keep that in mind if anyone is planning to hold positions for a long time e.g. months and years. It's not possible to hold them for years actually as they will expire within a set number of months. For short term trading the decay should be negligible especially if your options/warrants are not close to the expiry date.

 

[cutz]

Yes, you've summarised the use of these instruments well.

Neither of them should be used for long term investing type of use. Especially Options and warrants decay in time and lose value at an increased rate as it approaches expiry, so keep that in mind if anyone is planning to hold positions for a long time e.g. months and years. It's not possible to hold them for years actually as they will expire within a set number of months. For short term trading the decay should be negligible especially if your options/warrants are not close to the expiry date.

Correct options ( I can't really discuss warrants ) not really suitable for long term investing due to other factors but on the contrary long term positions are available with minimal time decay, an example is a 17th December, 2020 expiry BHP call 22.04 strike, no time decay on this position, long term expiry, approx. valuation of 15.24, I tested the bid/ask on a deep in the money today, not bad....

 

[Zaxon]

Correct options not really suitable for long term investing due to other factors but on the contrary long term positions are available with minimal time decay

What are these other factors?

 

[cutz]

What I'm getting at is you can't really generalize an option as having one particular feature, a position has multiple facets and considerations like time decay, delta, sensitivity to a change in delta, volatility,sensitivity to a change in volatility, interest rate considerations, divi considerations.... A starting point is deciding what your outlook is then structuring a position to suit, for example if you're convinced that a particular stock is going to shoot thru the roof buy OTM calls, negative theta will be large but positive gamma will be on your side if you're correct, you will also be long vega but prob not to your advantage due to the negative skew on the call side, a tweak could be selling higher strike calls to help fund this position and flatten out negative theta but this will cap profits....selling twice the higher strike calls will fund your position and take you to max profits around the outer strike but of course you'll be screwed if a takeover is announced...

 

[aus_trader]

What I'm getting at is you can't really generalize an option as having one particular feature, a position has multiple facets and considerations like time decay, delta, sensitivity to a change in delta, volatility,sensitivity to a change in volatility, interest rate considerations, divi considerations.... A starting point is deciding what your outlook is then structuring a position to suit, for example if you're convinced that a particular stock is going to shoot thru the roof buy OTM calls, negative theta will be large but positive gamma will be on your side if you're correct, you will also be long vega but prob not to your advantage due to the negative skew on the call side, a tweak could be selling higher strike calls to help fund this position and flatten out negative theta but this will cap profits....selling twice the higher strike calls will fund your position and take you to max profits around the outer strike but of course you'll be screwed if a takeover is announced...

Good explanation cutz. Basically anyone new to options should read up on these factors that affect options pricing and you've pretty much covered all of them via Greek alphabet

 

[Kavabanga]

Maybe Uber's IPO wasnt the best, and it lost almost 12% in two trading days, seems that the stock is trying to recover. Actually today it closed the gap...Is not it a perfect place to short until 28$ for example, and there buy and hold... we all know that 45$ was overpriced, so does Uber know I guess (closing price was 41.22$ last hourly candle is long and red, is not it a sign?)... Thoughts?

 

[Zaxon]

Maybe Uber's IPO wasnt the best, and it lost almost 12% in two trading days
Thoughts?

My thoughts are you're taking this thread off topic. This thread is about shorting ASX stocks in general. Feel free to post your message in the international section, here: https://www.aussiestockforums.com/threads/uber-ipo.34607/

 

[cutz]

My favourite method of shorting, (will not state the underlying but basically a top 10 asx stock which I'm always short due to other factors) is setting up an iron fly / centre strikes below the underlying (short straddles long strangles with double the size on the long put ) , over the course of time chopping in and out of the short put side.

Just have to mention, doesn't always go my way.....

 

[cutz]

Far out !!!

With the unexpected liberal victory I got caught on the wrong side of this position, will make good by buying a call fly (debit spread) over the top but it will cost me !!

Anyone else caught up holding bank shorts ( The Widowmaker Trade ) this week, how are you dealing with it ??

 

[aus_trader]

Far out !!!

With the unexpected liberal victory I got caught on the wrong side of this position, will make good by buying a call fly (debit spread) over the top but it will cost me !!

Anyone else caught up holding bank shorts ( The Widowmaker Trade ) this week, how are you dealing with it ??

cutz I feel your frustration mate, I was thinking about pulling a warrant short on one of the big four as well, but there was just too much volatility on the big mother of mortgage holders. You know 'which bank', right?

It's not easy to find the right stock (and time it) that is going to go into freefall. I am more cautious with the big banks because the government is very protective of them (the four pillars etc). I remember a lot of traders got caught trying to short the Aussie banks during GFC (2007/2008) when the government put a ban on it. So people who had short positions had to liquidate them (buy back immediately) whether the position was in profit or loss !

 

[Zaxon]

I remember a lot of traders got caught trying to short the Aussie banks during GFC (2007/2008) when the government put a ban on it. So people who had short positions had to liquidate them (buy back immediately)

Did that ban only apply to actual stock shorts? Not puts?

 

[aus_trader]

It's not exactly clear what would have happened to existing puts. But according to the article below any new positions were banned (referred to as naked selling). Anyway it's good to read and learn this type of measures that are taken by the governments of UK/Australia because let's face it it's hard to figure out what to do in a market panic like 2007/2008. I'll be honest I wasn't prepared and I didn't liquidate my portfolio (at that time) once the panic selling was underway and market was in free-fall. I think the learning/experience from that would be to liquidate my stocks once bear market kicks in.

Anyway, I'll stop talking, here's an article from 2008, governments doing their thing to stop the collapse of the financial markets during the savage bear market:

Australia: ASIC Bans Short Selling
Last Updated: 17 October 2008
Article by Richard Batten
Minter Ellison

The Australian Securities and Investment Commission (ASIC) joined its US and European counterparts in announcing new measures in relation to short selling in an effort to restore investor confidence and maintain the fair and orderly operation of the market.

The new measures were announced on 19 September 2008 in consultation and co-operation with the Australian Securities Exchange (ASX), and further clarified by ASIC on 21 September 2008. They apply from the opening of the market today, Monday 22 September 2008.

The measures, which have been described by ASIC Chairman Mr Tony D'Aloisio as 'circuit-breakers', include:

• a ban on all naked short selling transactions
  From the opening of trading today, ASX will remove all securities from its Approved Short Sale Products List – the list of stocks approved for naked short selling. This means that the exemption afforded by s1020B(4)(e) of the Corporations Act 2001 (Cth) no longer applies.

• a ban on all covered short selling transactions (subject to a limited authorised market-maker exception)
  Covered short sales of securities, which were previously authorised under s1020B(4)(c) or (d) of the Corporations Act, will not be permitted, except for those transactions entered into by ASX Approved Market Makers or Warrant Market Makers.

• reporting and disclosure requirements for permitted covered short sales
  A market participant must, at no later than 9:00am on each trading day, inform the market operator of their net covered short positions as at 7:00pm on the previous trading day.

In addition, a market participant must before selling a s1020B product on behalf of another person, ask that person whether the sale would be a short sale to which the reporting and disclosure requirements apply. The market participant must record the answer to this question in written or electronic form before selling the products.

These measures have been introduced to ensure that the restrictions imposed by other international regulators do not cause unwarranted activity on the Australian market.

ASIC will reassess the position for covered short sales for non-financial stocks in 30 days. In the case of financial stocks, the review period will reflect the time limits imposed by other regulators, such as the UK Financial Services Authority (16 January 2009) and US Securities and Exchange Commission (1 October 2008 unless extended). ASIC has also indicated that the proposals will be in place until the Government's proposed short selling legislation.

While the Australian measures are similar to those imposed by other regulators, the following features are distinct:

• the prohibitions are not limited to financial stocks which was the approach taken by the UK Financial Services Authority (FSA)

• the reference to 'securities' and the narrow definition of 'securities lending arrangements' in ASIC Class Order 08/751 and 08/752 may mean that listed funds and derivatives or other hybrid instruments that only involve synthetic obligations may not be subject to these new measures and

• the implications for counterparties of ASX Approved Market Makers is unclear.

ASIC has indicated that it will work with industry on transitional issues affecting bona fide market transactions.

This morning, ASIC also advised market participants that it would provide a no action letter for hedging of existing positions of market makers arising from their client business. The terms of that letter are expected to be settled today.

In conjunction with its earlier class order simply requiring the reporting covered short sales, ASIC also issued Regulatory Guide 196 – Short selling: Overview of s1020B which explains the regulation of short selling in Australia under s1020B of the Corporations Act 2001 (Cth).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

[cutz]

All good,

In essence delta 1 shorting over the GFC was still on by the use of put/call synthetic positions, easier than shorting the actual stock pre/post 2008.

 

[aus_trader]

Not wishing to start more threads since there are plenty already on ASF, but want to discuss Options in a bit more detail on this thread, hope it's OK with you Zaxon.

As I mentioned before it's better to prepare when things are stable rather than to work out strategies when the market is plummeting like during GFC.

So I like to explore Options in more detail for shorting strategies since they are supposed to be quite versatile compared to say warrants. Options can do complex strategies like: spreads, straddles and even Iron Condors. Don't ask me the latter ones I am still learning and don't actually employ any of them at the moment. So what brokers offer the best Options brokerage in Australia?
Just to get the ball rolling I will start the list:

Comsec: $34.95
Bell Direct: $30 or 0.3%, whichever is greater + ASX Clear transaction fee