Various applications of short sale and put options
Short selling is a trade of landed property stocks where the overall returns from trading the property deficient of arrears incurred by the right to dispose of the land. For such cases, if those who claim approve in taking a lesser amount of the debt owed, then the real estate will be sold successfully.
In financial terms, a put option or put is a device in the stock market which provides the owner of a put the privilege, but not a duty, to sell an asset at a price which is specified at a date that is already predetermined to a given party. A full report about it can be obtained here.
When to Use Them?
- As a result of the various risks involved, short selling is advisable to be used by only experienced and expert traders who are well acquainted with the regulations and the various risks of shorting that are involved. Put buying is a better preference for the average investor than short selling due to its limited risk factor.
- With regard to an experienced trader or investor, having to select between a short sale and puts in order to implement a bearish strategy depends mainly on numerous factors that are risk tolerance, investment knowledge, speculation vs. hedging, cash availability, etc.
- In spite of the huge risks, short selling is the right strategy through broad bear markets, as the stocks decline at a faster rate rather than going up.
- Short selling has a lower risk when the security that is of a short position is either an EFT or an index, as the risk of runaway profits in it is lower than the individual stock.
- Puts are specifically more suited for hedging the risk of the downhill trend in a stock or portfolio, as the best that can occur is that the put premium is lost mainly due to the decline which did not materialize. Even then, the rise in the portfolio or the stock might result in the offset of either a part or the entire put premia that is paid.
- Implied volatility is of more importance while purchasing options. Buying puts on highly volatile stocks might result in the payment of massive premium; hence ensure the cost of buying such hedge is justified by the risk entitled to the long position or portfolio.
- Not to be forgotten a long position in an option whether it is a call or a put results in investing in wasting assets due to the time delay.