My recent column on exchange-traded bond funds generated a lot of interest and a fair amount of frustration, as many readers found it difficult to execute short-sale orders on these ETF products. A typical email went like this:

I tried to short iShares Lehman 20+ Year Treasury Bond Fund (TLT) today and was rejected by three different brokers due to unavailability. Do you have any suggestions on where to go?

After numerous emails echoed that complaint, I decided to perform an impromptu and unscientific study into the feasibility of shorting these contracts. But before I reveal my findings, let me briefly review what a short sale is and the process of doing it.

Selling What You Don't Own

In a short sale, you're essentially borrowing shares to sell to someone else, in the hopes of buying them back later at a lower price and pocketing a profit. The process of locating available shares is the responsibility of a brokerage firm's stock loan department. Most large firms do this in-house, while smaller firms outsource the job to prime brokers. One of the great profit centers for investment-banking firms is the ability to offer prime brokerage services to institutional and hedge fund clients.

A major determinant in the ability to borrow or short shares is the total number of shares available to trade, also called a security's float. Technically, short-sellers should earn interest on the credit that their accounts receive from short sales, but brokers often charge a fee for the cost involved in locating and lending hard-to-borrow shares.

As relatively new products, bond ETFs still have a fairly small float, ranging from 1.5 million shares on the short-term iShares Lehman 1 to 3 Year Bond Fund ( SHY) to 1.1 million on the TLT.

A spokesperson from Barclay's says there's no plan right now to increase the float, but "there is no obstacle to issuing more shares, and it will be done accordingly to meet the needs of the trading market."

So who's able to short this product? Just like with everything on Wall Street, money plays a large part. But the size of your account is not the sole criterion; squeaky wheels seem to get the grease.

If you're a retail customer who enters an order online, you probably won't be able to borrow shares, according to my informal survey. The one exception seemed to be through Ameritrade ( AMTD), which executed short sales of 200 TLT shares on the first submission for a $30,000 account. Scottrade did not lend the shares to a $100,000 account. Meanwhile, an individual with a $1 million account clearing through SLK had no problem shorting 1,000 shares. Further up the food chain, a small hedge fund with just under $5 million under management was told by his prime broker that he could short 5,000 shares immediately, but would need time to locate additional shares. Large funds seem to have little problem borrowing a few thousand shares.

Your broker will be more responsive if you get on the phone and talk to a live person. And the more money you have, the more likely your broker is to take your call and provide service. You'll need to check the shares' availability before entering the actual order. However, this should by no means be construed as a recommendation to short these ETFs; it's merely a pulse check. If you do decide to proceed, I'd love to hear from more readers about their experiences, and I'll report the results next week.

Focus on Options

Of course, I'm here to tell you how options can help you avoid all this aggravation. Buying puts on these bond ETFs will create a bearish bet that rates will rise. But to truly recreate a short share position, consider constructing a synthetic short using options. You'd do this by simultaneously buying a put and selling a call with the same expiration date.

For example, with TLT trading at $95, you could buy the July 95 put for $2.50 and sell the July 95 call for $1.70 for a net debit of 80 cents. Essentially, that makes you short TLT at $94.20. The discounted sale price is the cost of the premium paid for the option. If you plan to use a synthetic position, be aware of its limited lifespan and the increased margin requirement of maintaining two option positions. Also, consider the low volume and lack of liquidity in these new ETFs. You might want to use longer-dated options to protect or profit from a change in the overall trend of interest rates.

Another alternative to the iShares would be the options created by and traded at the Chicago Board Options Exchange on various bond indices. Two of the most popular products are the 30-Year Yield Index, or the TYX, and the 10-Year Yield Index, or the TNX. Unlike the ETFs, which are actually made up of bond holdings, these two products are simply tracking indices, meaning there are no underlying shares to trade. The index value tracks the bond yield, not the price. For example, the TYX was lately trading at $43.86, which correlates to 10 times the current 4.38% yield in the 30-year bond. So, if you think rates are going to rise, you'd buy calls, as an increase in yield would result in a rise in TYX's value.

The Dividend Factor

A few readers asked how iShares handle or account for dividends. Here's the official response from Barclay's:

"iShares portfolios managers operate under a mandate to track, as closely as possible, the price and yield performance, before fees and expenses, of target indexes. That includes generating a comparable dividend stream. But an index is an unmanaged mathematical construct, not an actual portfolio. Actual portfolios cost money to operate; indexes do not. Cash received in a fund portfolio is first applied against current liabilities or expenses. Depending upon the index mandate, remaining cash is either 'banked' to fund future fund dividends, or reinvested in the portfolio."

Bottom line? You won't be receiving a dividend distribution. The income earned on the bond fund is calculated monthly as part of the fund's total return. So given the transaction fees relative to the extremely low rates offered, these products should not be used for short-term income generation.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to Steve Smith.

More from Markets

IBM Shares Jump After 'Strategic Imperatives' Drive Q2 Earnings Beat

IBM Shares Jump After 'Strategic Imperatives' Drive Q2 Earnings Beat

Dow Falls on Trade Worries but IBM Surges as Earnings Beat Forecasts

Dow Falls on Trade Worries but IBM Surges as Earnings Beat Forecasts

Are the World's Biggest FANG Stocks Screaming Buys?

Are the World's Biggest FANG Stocks Screaming Buys?

Video: What to Expect From Microsoft's Earnings Thursday

Video: What to Expect From Microsoft's Earnings Thursday

Top Strategist Reveals the Stocks to Focus On For the Last Half of 2018

Top Strategist Reveals the Stocks to Focus On For the Last Half of 2018