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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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Thomsett Options
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Getting Started in Stock Investing and Trading
  • Is Short Selling Obsolete? 0 comments
    Sep 13, 2013 3:22 PM

    There are numerous problems with short selling. This traces back to the pre-options world, when bearish traders had no way to play a down market other than borrowing stock to sell. It's high-risk and expensive and most traders would avoid shorting even if it also means losing opportunities. But today we have other solutions.

    A second problem with shorting is that it distorts the markets. When an issue experiences a large volume of short covering, it looks like buying pressure, so many traders who are unaware of the source of all those buy orders might believe, falsely, that there is demand for shares. They get burned when the price doesn't move, or continues downward even in the face of large-volume buying. It is not demand but short covering, and it distorts everything.

    The solution? Buy puts instead of shorting stock. It's cheaper, less risky, and does not require borrowing stock. An argument against this might be that some short sellers want to hold those positions over a period beyond a few months. The solution to this is to buy LEAPS puts.

    The fact is that shorting is an obsolete strategy; it serves no good purpose in the market when you can more easily buy puts; and it is lower-risk. I would even favor banning short selling altogether, not with the rationale that it is expensive or high-risk, but based on how high-volume short covering easily distorts the appearance of supply and demand for shares. How many inexperienced traders and investors jump into positions because they see a high volume of buying, not realizing that it is a false picture of what's going on? Shorting is obsolete because we do not need it today, when long puts present a much cleaner and safer alternative.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

    I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Newsletter - I look forward to having you as a subscriber.

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