Jon Lewis

The Best Way to Short Stocks

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Of course, the life of the option is limited, whereas the short sale has no defined life. However, the owner of the stock (remember that you borrowed the stock from someone) can call their shares back at any time (although this rarely happens). On the other hand, as a put owner, you control when the put is sold or exercised.

In addition, you are paying a time premium for the put and, thus, the option will suffer from time erosion such that the time value is 0 at expiration. So you'll need the underlying stock to drop in order to see a gain.

Another advantage of puts is that they're frequently allowed in retirement accounts, whereas shorting is not. Furthermore, if you short a stock, you are liable to pay the dividend to the person or entity that loaned you the stock. Put buyers pay no such dividend.

The bottom line is that buying a put represents a much simpler way to bet on a stock's downside movement. You avoid the hassle of finding the stock, creating a margin account, and putting up a lot of cash. The cost for puts is low, you can buy and sell them any time, and they're freely available and usually very liquid.

I'm certainly not advocating that you run out and buy a bunch of puts. Betting on the downside is not easy, as you're constantly fighting the market's upside bias. But if you want to take advantage of a bearish move, buying a put is usually your best bet.

And if you want some help selecting the best ones, be sure to check out How to Pick the Right Put Option.

Jon Lewis is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Jon, read his bio here.