Forget about short selling stocks. Do this instead! // Shorting stocks explained, Selling put options explained, Writing put options, Selling puts for income welcome to looking at the markets with me
David Moadel today's video is going to be a kind of basic but it's also a good
review for anybody who likes to short sell stocks or ETFs commodities
currencies whatever
this might just get you thinking about an alternative to short selling
all right so it no matter what level you're at you can certainly benefit from
this
and if you're a beginner or intermediate this will definitely benefit you
so today's topic is forget about short selling stocks forget it
now here's a better way all right well let's say you think that the market is
going to go down or maybe a particular stock or ETF or commodity currency
whatever you think it's going to go down in the future and you can make money
from that ok most retail traders just think about buying low and then selling
later on when the price goes up
but you can be like this guy with his evil grin alright he's happy because the
market is going down he's excited because he's making money and that can
be you
alright most people just go along you know they buy a stock or whatever when
the price when they think the price is low and then they hope and wait for the
price to to go up and then they sell at a higher price and they make a profit
but there are people who do short selling
they they actually sell first they sell before they buy
it's kind of backwards they sell because they think the price of something is too
high
they think it's going to go down in the future and then if the price does go
down then they can buy back the stock or whatever that they sold short they can
buy it back at a lower price
remember they already sold it so they can buy it back at a lower price for a
profit
of course you can go the other way around price can go up and then they
have to buy back at a higher price than they sold short for and that would be a
loss
so again this is a lot of this is a review but I'll make it quick
so the short selling works this way basically you're the investor and you
you don't own the stock but you want to sell it to somebody because you think
the price is going to go down
it doesn't have to be a stock when I say stock it could be an ETF could be a
commodity currency whatever so but i'll just say stock from now on to make it
simpler
so the investor borrows shares of stock from from the broker from the brokerage
ok so the broker lens the shares to the investor and that's you
if you're short selling and then you sell it to somebody on the open market
all right and then hopefully the price goes down
hopefully now remember you don't own those shares of stock you just borrowed
them from the broker and the broker is going to want those shares back
you don't get to keep them forever so at some point you're going to have to buy
back those shares of stock
hopefully at a lower price but if the price went up
then you might have to buy back the stock at a higher price
ok but let's say the market or the stock does go down
great then you can buy those shares from the open market at a lower price than
you sold them for so you made a profit
ok and then you return those shares of stock to the broker and that that's how
you make a profit if you're short selling
but here's the thing about short selling
ok let's say the prices here when you make the short sale you initiate it
all right
your profit potential is it can be pretty big
you can make a lot of money if the price of the stock goes down and down and down
but remember the price of the stock the price of any stock can only go down to 0
it can't go any lower than that and so your profit potential is limited
again it could be a lot of money but it's limited it's not it's not unlimited
now what about your loss potential what if you short sell the stock and the
price of the stock just keeps going up and up and up and up and up
well there's no limit to the amount of money you can lose
remember the price of the stock can go down to 0 but not below zero
but there is no ceiling I mean it could at least mathematically or theoretically
the price of a stock and just keep going up and up and up to infinity
I mean there's no highest price on a stock so your maximum loss your
potential losses are unlimited
in fact you can even that not only could you lose all of all of the money in your
trading account you can even lose more than that and then you'll end up owing
money to the broker and that's pretty bad losing all of your money and doing
some money
you know it's probably not a position you want to be in
and if this sounds impossible I mean there are penny stocks micro cap stocks
small-cap stocks that can after you make a short sale
you know those small cap stocks can jump up in price very quickly they can double
triple quadruple or even more in price and now you're in you're in deep trouble
financially if that happens
ok here's another way of looking at it short selling again the share price goes
down after you make the short sale
you can as it goes down you make more money and you can make a lot but there
is a limit because the the stock's price can only go down so much
whereas the as the share price goes up and up and up your potential losses are
unlimited
so let's look at an alternative how about buying put options instead instead
of a borrowing shares of that stock or whatever from your broker and you have
to have a you know generally speaking you have to be approved for short
selling and you probably have to have a margin you have to be approved for a
margin account and so you're borrowing money or borrowing shares i should say
arm
here's an idea and you don't really need a necessarily a margin account for this
and you don't have to be approved for short selling for this strategy this
alternative
you do have to be approved for buying put options but I don't think it's that
difficult to be approved for buying put options
okay i mean that's like that's between you and your broker but if you shop
around for brokers
there are some very option friendly brokers out there that are likely to
approve you for that
so you may want to add depending on your situation of course so you know you can
shop around for that four different brokers but you know you don't have to
borrow shares you just you buy one or more put option contracts and what's
great about this is that your potential profit again
you know it's sure it's it's limited just like it is with a short selling
because the price of the underlying equity the stock etf whatever i can only
go down to 0 but what about the losses
they're capped there's a maximum loss
the most you can lose when you buy put options is whatever you paid for those
put options
so for example if you bought five hundred dollars worth of put options or
puts the most you can lose on that trade is five hundred dollars
you cannot lose more than that so notice that the share price the price of the
stock goes up and up and up
it keeps going up and up and up but your maximum loss doesn't keep getting bigger
and bigger
it stops at whatever you paid for the put options
unlike with a short sale where your potential loss your max loss is
unlimited and you know whenever I make a trade of any sort
I like to know in fact I need to know and what my max loss is going to be
I don't make a trade if I don't know how much i could possibly lose too many
traders especially beginning and intermediate traders are only thinking
of how much money can i make how much right but you really should spend as
much time or really more time thinking about what's the most i can lose
is it unlimited that's probably not the way to go there are exceptions but that
oftentimes not the way to go
as opposed to buying put options where you know what your max loss is and there
are our stories out there
scary horror stories ok this is from MarketWatch I remember this happened i
think was about a year year ago something like that
this this guy this trader retail trader a short sold you made a short sale on
kbi oh that's the ticker which is a kallah bios and because he saw that the
price was trading within a range i guess and you know it's kind of going higher
higher higher and and this this is a low-priced stock this is not like you
know apple or or some you know
priceline or some high-priced stock this this is one of the lower price stocks
and those lower price stocks
especially if they're smaller companies have the potential to either go way way
down in price very quickly or way way up in price very quickly
they can really jump up or down in price in a very short period of time
so this gentleman somewhere you know somewhere around here a short sold sold
short kpi oh and for some news related events for some reason
BAM the share price just rocketed up so quickly so fast that you don't even
really have time to react not much time
ok just shoots right up and this gentleman lost well you can see right
there over a hundred thousand dollars and if i recall correctly he ended up
calling i believe it was etrade you might want to double check the news item
on that I believe he ended up owing etrade eleven thousand dollars or
something like that som some large amount of money again that my exact
details on that might not be accurate you might want to check the news article
on that but if i recall correctly he ended up not only losing is you know
what's in his account but he ended up owing money to the broker region and
that's that's miserable
so you know you want to think twice about short selling especially if it's a
stock that's prone to large price movements and you may not know this
didn't look like it was prone to large price movements but anything can happen
in these markets
you never know so what's the takeaway of all this
well while short selling stocks is one way to profit from a stock or ETF that
you think is going to go down
consider consider buying put options
now you do this in small amounts ok please only only buy put options
you know only by in small amounts that you can afford to lose
ok I don't want you buying large amounts of put options please don't do that
ok small position sizes but consider buying put options as a safer
alternative with a limited maximum loss and that's what I like about put options
so much
alright so if you want some more help with this
you can contact me anytime my name is David Modell and my email address is
David Modell @ gmail.com thanks a lot i'm here to help you
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