Puts can provide an alternative to short-selling when you're bearish.

In my last post in this series, I explained what puts are and how they differ from calls.

If you're bearish on a stock, you have a few ways you can express that: sell the stock if you own it. Sell the stock, even if you don't own it, by borrowing shares from someone who does (short-selling), and then deliver the shares back to their owner later. Or you can buy a put, which gives you a right to sell for a given timeframe.

Short-selling can be tough: you have to contend with margin requirements and special rules, sell on an uptick. If you're wrong and the stock starts to rise, risks climb considerably, too. Buying a put can offer a relatively low-cost, hassle-free alternative to short selling.

Here's an example: you're bearish on a stock at 70. You can buy a put a 70 strike put with no uptick rules or margin considerations to worry about. If the stock drops below 70 as you predicted, you'll be able to buy the stock in the marketplace at the lower price then exercise and sell at 70 and secure those gains or simply sell the option contact on the open market -- it should be trading at a higher price because of the move. Of course, if the stock doesn't drop as predicted or continues higher, you could lose the entire value of the option, but that is all you can lose. If the stock continues up you have the right not the obligation to exercise and sell at 70 if you choose not to exercise your right so be it.  Still, if you're thinking of selling stock short, put buying might offer a logistically simpler, lower-cost way of expressing your sentiment.

In my next post I'll explain another use of puts: protecting profits on an existing stock position.

Regards,

Brian (OG)

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.