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If I believe that a stock or major market is going to decline, I can try to make money on that.
Inverse (Short) Funds – I can buy an Inverse or Short Fund that tries to mirror the opposite of the underlying index or sector. For example: Ticker symbol SH is an Inverse Fund for the S&P500. It’s not exactly the opposite as there are significant costs and structural issues in running these funds. The goal here is to make money if the S&P500 goes down. These funds can be useful for hedging an existing portfolio or trying to actually profit from declines. These are not good for long-term investing.
Put Options – Another choice that I have is to use Options to profit from declines in markets. Put Options are often considered insurance against declines in the underlying market. The hope is that Put Option prices go up if the underlying market goes down. Some investors utilize these for hedging and some use them for directional profits. There are other Option methods that can work as well during declines. Options are complicated and can be risky without complete understanding and experience. I will produce some training on these in the future.
Selling Short – If I believe that a stock is going to decline, I could borrow the stock and sell it. Yep. I can sell a stock/index/ETF that I don’t own. For example:
If I believe that the S&P500 is going down, I can borrow shares of SPY (the ETF for S&P500). These shares would then show up in my account. I also would carry a debt to repay these shares. Plus, I must pay interest on the loan of these shares until repaid.
Now I can sell these shares of SPY and the cash shows up in my account. If I sell the shares for $100 and they go down to $80, I can buy them back and pay off the loan for a $20 profit less some interest. If I sell them at $100 and they go to $120, I then lose $20/share when I buy them back.
It’s easy to see that Selling Short can expose us to large potential losses.
When institutional traders are active, they move large amount of money around. When they sell “short”, their accounts are “short” the stock which means they owe it. When the shorted position starts to go up or rally, these traders are eager to preserve profits or limit losses and cover the debt in the account. They short a stock or index to make money on declines and then quickly buy it back to cover the short position. This is called “Short Covering”.
I’m observing that the winners of today have been the biggest losers recently. This looks like massive “Short Covering ” to me. Short Covering does not change the trend. An upward trend is built on the backs of more and more investors wanting to own the position. This doesn’t smell like that to me.
Feel free to teach this to your family and friends and we appreciate the referrals. Send me an email if you have questions.
Here is a link to a training page that I did on “Shorting a Position”: https://squiggletrader.com/wp-content/uploads/2022/03/ST-Training-Shorting-a-Position.pdf
Here’s the video link: https://squiggletrader.com/wp-content/uploads/2022/03/Markets-Update-Short-Covering-Rallies-03092022.mp4
Cheers!
Bo – Chief Squiggler
Help Yourself. Help Others.
Disclaimer
This communication is not a recommendation to buy or sell any security. It is not to be considered financial or investment advice. This is an educational and training tool only. If a specific security is mentioned, it is for illustrative and hypothetical purposes. You must use your own knowledge to determine what to trade, how much to trade and when to buy or sell. Investing and Trading involves risk and you can and will lose money. Past performance is no indication of future results. You should practice with fake/virtual money (paper trading) before risking real money. All communications and videos are for members only and are not to be shared. Consider all content copyrighted.