Getting into a position oftentimes involves both longing and shorting assets. Only having the ability to be long an asset narrows the scope and potential of our trading universe. Typically, stock trading is already capital intensive and cost prohibitive. Adding short selling into the mix can undermine any edge that’s in a trade. Fortunately, there are plenty of ways to skin the proverbial cat.
Exchanges are listing new derivative products daily, from short term option contracts, to leveraged ETFs, to event futures. All of these products give us a wide array of opportunities to implement our trading strategies. Futures give us the easiest way into market as they allow us to leverage our cash (double-edged sword that it is) and to short as easily as to long. While futures trading used to be the domain of the great apes, exchanges have realized that even small chimps want in on the action and have obliged by offering futures contracts with smaller and smaller contract multipliers. For instance, the regular S&P future is worth $250/point. If it’s trading north of $4000/contract, you’re slinging a million bucks of risk at a clip. Too rich for your blood? Well, a mini future is also offered at $50/point…and even a micro future at $5/point for the baby monkeys. In all seriousness, the micro futures are a great way to get finer granularity to your trades. While trading the “big” future might leave you over or under-hedged according to your hedge ratio, trading multiples of the smaller futures will get you closer to your ideal position and perfect hedge ratio while not being completely cost prohibitive in transaction costs. So there’s something for everyone.
Perhaps your trade involves equities but shorting is costly, or even not possible. Some equities have single-stock futures listed for them, but for those that don’t, options provide a great vehicle to ride the short track. “Put-call parity” in options dictates that being long a put and short a call on the same strike is the same as shorting the stock … with some interest rate jazz thrown in. If you don’t want to be synthetically short the stock but still want the upside of a downward move, you can buy a put, or sell a call spread. Different implementations of your trade have different risks and rewards … shorting stock risks needing to be covered, selling futures risks leveraged losses, mitigating downside risk by selling option verticals risks being eaten alive by transaction costs since multiple contracts need to be traded. Conversely, they all have their particular upsides as well. It boils down to what you’re comfortable with as a trader, your style and risk tolerance.
Exchanges are never ones to miss out on trending opportunities. Whereas forex trading was once the domain of big banks and big sizes, nowadays any retail trader can swap odd lots with a press of a button, or sling futures or options on multiple exchanges throughout the world 24/7. Not too long ago, gaining Bitcoin exposure meant dealing with unregulated internet exchanges or trading peer-to-peer and actually needing to own Bitcoin. Exchanges hopped on that train and now trading BTC on a regulated exchange is possible with both futures and ETFs. There are even ETFs which move conversely to the indices...so you can short the market by longing the ETF, of all things. This is all to say that having a trade setup isn’t the only thing to explore. Given a vast multitude of ways to actually put on a trade, easy access to essentially any exchange in the world, and marketplaces that run virtually non-stop, finding optimal ways to implement your trade is just as important.
One of the "safer" methods of betting on the direction of a move is to sell option verticals of the opposite move. To clarify ... if you believe a stock will rise you can sell put spreads. Conversely, selling call spreads is a bet that the stock will fall, or at least stay unchanged. An advantage of selling the vertical is that you know exactly your max loss. While you also have this advantage in just buying the option in the direction you expect the stock to move, you have the added advantage of collecting the option theta if the stock doesn't move at all. You should be expecting a cost for this advantage ... your profit potential is capped whereas it's unlimited with the naked option. We provide you with a quick glance at the options available to trade on the stocks you choose. One caveat ... liquidity and bid/ask spreads play an important role in this strategy as it's multi-contract.
