Went broke betting against stock market

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Thus we are left with two options: short selling Apple or buying a put option. Here we have the example of shorting shares. Not bad! In this example, we buy one at-the-money put with a two-month expiry to show our view. It turns out we lost money. While we were right about the direction of the trade, because the volatility we bought was too high, the premium we paid outweighed our benefit.

What if we used a put debit spread instead. Here we bought a put, and since we believe the price will only go down moderately, we sold a put. It looks a lot better. It seems like the short shares are still the winner. Despite this, we need to consider the fact that we could be wrong on the trade. Verdict: A simple long put is a bad option here.

In this case, we would evaluate whether, if we are wrong, we believe it is possible Apple could move up significantly. If so, a put debit spread may make more sense. If not, then shorting shares will provide the best return. What About Short Squeezes? Despite the plethora of choices we have to make money when the stock market falls, there is still added risk when placing most bearish trades.

The reason is simple. The lowest an asset can go is zero aside from rare instances. That also coincides with the most a trader can lose on a trade. Yet, there is no cap to the upside. By short selling a stock, the price can, in theory, go to infinity. When the stock price continues to go up, the thesis often continues to get stronger, as does position size. This adds risk. Remember, the market can remain irrational longer than you can remain solvent.

Prolonged or drastic short squeezes will bankrupt bearish investors at the worst possible moment. Using bearish options spreads can mitigate this risk when options are readily available. The good news is that events like short squeezes are actually relatively uncommon and only occur on heavily shorted stocks.

After all, to have a short squeeze, you need many investors who are short in the first place. There is real ownership of the asset in question the stocks when you short with real equity stocks. The green flag marks the start of the trade and the red flag marks the end which is the moment where the short sellers buys to cover.

S stock market for example. S stock market, the top companies by market capitalization. You get the idea, constructing a short against a large group simply requires that you study carefully what are you targeting and why, so know the question becomes: which assets do you want to short? What is a short squeeze? That same action of buying to cover at a higher price combined with a huge bullish pressure ends up fuelling a massive price increase. The image above is a good example of how a short squeeze could have happened if short sellers opened their trades at the green dot and then prices continued to climb forcing them to close their trades at a loss buy to cover causing prices climb even further.

Conclusion Short selling opens a whole new world of trading opportunities. Now we can also bet against stocks and several other assets, the real question now becomes: when to do so? Got the idea?

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