Most Investors Are Optimists, They Never Short Stocks

Most Investors Are Optimists, They Never Short Stocks

Most Investors Are Optimists, They Never Short Stocks


Stocks go up, they go down, and up again…

Most retail/civilian participants focus only on stocks that go up. That makes sense to many people as markets do tend to rise over time, but nothing happens in a straight line.

If only buying for the long term, participants miss out on profits from at least 50% the market’s action.

But, now the what many expect to be a grim earnings season for equities, it may be the time to profit from the Southside action.

The Big Q: How is this done?

The Big A: By shorting.

Shorting is when a participant sells shares 1st and buy later.

That is done when a participant expecting that the share price will fall sells them 1st and then buys to close the position for a profit (or loss).

Shorting is expensive.

Stocks have to be borrowed from a holder, and the costs of doing so can range from anywhere from 5-50% of the share price annually. And if the trade goes against the shorter margin calls come fast.

Even if right on the trade, and sold short a stock that goes to Zero, the most you can make is 100%. And so shorting the market is usually for professionals only

But, rather than avoid this half of the market totally, retail participants might consider a strategy with a lower risk and higher reward.

Specifically, that of buying Put options.

A Put option bets on a stock’s Southside potential. But since an option is bought and not the stock, the most one can lose is the amount Put into the trade, and there can not be margin call.

Instead of a 100% cap on potential profits, a participant can make larger percentage gains.

Right now, several stocks look set-up for pullback or major corrections.

  1.  EV maker Tesla Motors (NASDAQ:TSLA), a Wall Street darling stock is an example. The Bulls do not care that the stock has no earnings and might never have. Or that they lose money on every car that they sell, even as sales go up, and that the company runs as a “rentier”. At some point, earnings will matter again. Shares will correct deeply. Note: Rentier means excess payment made to or for a factor of production over and above the amount expected by its owner. Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity. Economic rent arises due to market imperfections; it would not exist if markets were perfect, since competitive pressures would drive down prices. Economic rent should not be confused with the more commonly used “rent,” which simply refers to a payment made for temporary use of an asset or property.

There are many other Wall Street story darlings that are in this same category including: (NASDAQ:AMZN) at 500X projected earnings, and Facebook (NASDAQ:FB) at 85X projected earnings.

These are Wall Street darling play that have far outperformed the broad market in the past year and and due for pullback or deep corrections.

For each story stock, buying some long-dated Put options say an October or January strike price well below today’s prices (out of the money) could lead to double-digit returns on a small market selloff, on a big selloff, like another 10-20-38-55% correction, they could bring about huge returns.

Market sentiment is high now, so it is a good time to think about playing the short side of the market when the costs are low and risk/reward ratio high.

Stocks go up, they go down, and up again…

Learn about it, be prudent, and remember the name of this Wall Street game is to make money

Have a terrific weekend.

The following two tabs change content below.

Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

You must be logged in to post comments :