I sometimes do short selling of stocks. It never occurred to me to buy puts instead of shorting stocks. Is the buying of put options always better than shorting stock?

Answer

No, not always. The downside to buying puts instead of short selling is that if the underlying stock goes on a non-directional trend, neither up nor down, your puts will continue to lose value each day that the stock price remains stagnant. The stock may remain in a trading pattern for a long time to the point where your puts lose all its value. On the other hand, if you short sell the stock and its price goes on a trading pattern, neither up nor down, you don't lose nor gain any value on the stock. You may lose a little money in interest but not as much as losing the entire value of the puts you purchase. The big advantage of buying puts is that your potential loss is defined and fixed not to exceed the amount you paid for the puts. At the same time, your potential for profit is unlimited. In the case of short selling stock, your potential for profit is also unlimited for as long the stock goes on a continuous downtrend (same as buying puts). But the big disadvantage of short selling is that if the stock goes on a rising trend, your losses are unlimited.

With short selling, you have limited profit potential with UNLIMITED LOSS EXPOSURE, while with put options you have LIMITED LOSS EXPOSURE with the same profit potential.

Updated on May 9, 2018

Original Article:

This Is How to Safely Short Sell Stocks
By Daniel Mollat
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