Protect Those Bets on the Short Side
Editor's note: This column was originally published March 11.
The current wisdom says that once war with Iraq starts and it becomes apparent the U.S. has things well in hand, stocks are poised to rally sharply, possibly even marking the end of the bear market and the beginning of a new bull. This view has many short-sellers, now in the fourth year of their post-bubble feast, not wanting to overstay their welcome. They're getting nervous and quick to cover. And I believe that after so many months of anticipation, the commencement of military action will bring an initial rally.
But until proven otherwise, we're still in a bear market for stocks. So it seems to make sense to me that rather than fight the tape from the long side, investors should keep an eye out for opportunities to make money from the short side.
Short Until Proven LongWhile it's definitely a little late in the game to begin a wholesale short-selling campaign, looking at ways to establish and maintain some selective short positions might be useful. I and others have described how recent activity in the options market has been dominated by covered-call writing as investors look to generate income while preserving the potential for upside gains. If longs can try to improve their cost basis by selling options, so can the shorts. In this column I'm going to describe the mirror image of covered calls: selling puts against a short stock position. What's better is the fact that puts generally -- and that's the case now -- sport slightly higher premiums than calls, providing an improved rate of return.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV