by Michael Shulman 08/06/08
You are selling this call against shares you hold long because you do not believe the price of the stock will rise above the "strike price" of the call -- the price at which the owner of the call can buy the stock from you. Selling a covered call at a strike price above the current price of a stock is best described as a "defensive position."
Selling a covered call at a strike price below the current price of the stock is clearly another way to short a stock.
Other Methods
There are other methods for shorting a stock, such as selling a naked call (i.e., you sell a call without owning the underlying stock), but they are unsuitable for individual investors, not just because of their risk but virtually all credible stock brokers will not let individuals write naked calls.
There are a variety of ways to establish a bearish or even neutral position by shorting stocks, selling calls, or by buying shorter-term or longer-term put options. You can make unlimited profits by shorting the stock or the calls, but if the stock starts going up, you might find yourself facing potentially unlimited losses.
Only you know how much risk you can afford to take on, but if you're looking to define your risk from the outset, then buying put options is probably your best bet. The most you can lose is what you spend to enter the trade, and the more the stock drops, the more profits you can make.
If you enjoyed this article, check out Michael Shulman's "Making a Short Trade" and "Trading Tactics for the Short Side."
Ruby Tuesday: No Place Like the Short Side
Do you have a big menu of options facing you? I'll walk you through an incredible trade on Ruby Tuesday (RT).
What are the five rules for constructing great short-side positions? Read on to find out.
Live Well, Thanks to Dying Companies
If you don't want to buy a company's products or services, you shouldn't buy its stocks.
Money Does Grow on (Dollar) Trees
You know what you can get for a buck, besides a hamburger or a candy bar? An incredible short-side position that could turn 500% in a matter of weeks.
There's money to be made from the economic slowdown. Listen to find out how we did it on the short side.
