Options Mailbag: Short the Transports

This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.

In this week's Options Mailbag, we tackle questions regarding the best way to short the transportation sector.

Hey Steve, I'm looking to get short the transports, is there a good way to use options?

-- JM

In my first round of give and take with JM, I asked what he meant by the transports, as there are many subsectors: airlines, truckers, railroads and shipping companies.

After a little research, we were both stymied by the fact that we could not find exchange-traded funds that have a concentration in any in of these areas. Our conclusion was that in each area, there are only a handful of stocks, making the logistics of creating an index for each inefficient.

But with new ETFs being rolled out every day, we could be wrong. So before I give my suggestions, I'll ask a question. Does anyone know of some ETFs that focus on a specific part of the transportation industry?

The major benchmark is iShares Dow Jones Transportation Average ( IYT), but it covers a mix of all the businesses mentioned above.

Still, if you want to be bearish or short the sector, there are several ways to use options. The first and cleanest would simply to be buy put options. But I don't like that because the options are thinly traded, which results in wide bid/ask spreads making it costly to enter and exit positions.

For example, with IYT trading around $92, the September 90 puts is $3 bid and offered at $3.50. Even if you can execute a trade in the middle at $3.25 and the same occurs on exiting the position, that amounts to i5% of the option's fair value. In trading parlance this is known as slippage, and combined with time decay, it creates a tremendous headwind owning options.

Sell Write Might be Right

I'd rather use a strategy that sells options and takes in premium. The most obvious strategy would be to sell calls. But many people can't short options naked.

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