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3 Methods of Shorting the Stock Market

|Includes: DIA, DOG, DXD, SDS, ProShares Short S&P 500 ETF (SH), SPY

This is the number one question I get all the time once people hear that the past2 years have been the best trading years I have ever had.  I get the look of  “um yeah your full of  s$%#” so I have to show them.  Shorting stocks is not hard and yes there is risk, but how risky has it been going long the past year or so?  And a plus of the downside is that stocks go down a lot faster than they go up.  For instance by March we erased all of the gains from 1996-2007 (11 Years) in the matter of 1 year and 5 months.

I’m going to keep these 3 ways very concise and open for discussion.  Easiest to complicated:

1. Buy inverse ETFs.  Advantages:

  • These have the same great characteristics of ETFs and you can purchase them just like any other stock or ETF throughout the trading day.
  • There are even inverse ETFs that are double or triple leveraged, which means as an example if the S&P500 goes down 2% on a given day and you owned SDS (double short S&P) you would make 4%.
  • Another great advantage of investing in inverse ETFs is that you can buy these even if you cannot have a margin account, such as in your tax-deferred savings accounts (401(k), 403b or IRA)

Here is a link to the Proshares list of inverse ETFs they cover every sector that you can imagine:   Proshares

2. Short stocks straight up.  This requires a margin account.  The pluses are:

  • You don’t get any price nuances, which happens sometimes in the inverse ETFs, where an inverse fund isn’t exactly performing as well as if you shorted directly.
  • Still very easy to do using most online broker consoles instead of selecting “buy” a stock select “short”

3. Options.  This requires the ability to trade options with your broker, which usually means some extra forms to fill out.  Advantages:

  • Leverage - You can put a smaller amount of money down for a lot more action.  This can also cut against you and most options are not for the faint of heart with the price swings that occur in a given day.
  • Use options to hedge against your long positions.  Say you have 500 shares of SPY.. you can buy 5 covered puts to help cover your downside without putting up the price of 500 shares of SPY.
  • This section has way too much info on it… books upon books of strategy  including names that you would see in your biology book like condors and butterflies….so I’m just going to leave it where it is… and I can posts more details on options another time.

Disclosure: Short DIA