Friday, January 10, 2014

Shorting the unshortable

In "Thursday's Outcomes" I noted the difficulty I was having in opening a bear position in EWZ. The stock had given a bear signal. So far so good.

However, implied volatility sat precisely at the 50th percentile, and when volatility is middling, then the best bear play is to short the stock.

Which I dutifully attempted to do, only to be told that the shares couldn't be borrowed for the trade.

After some reading, I've concluded that a synthetic short future options spread is the best way play EWZ to the downside.

To open a synthetic short, sell an at-the-money call and buy an at-the-money put, both with the same strike price and expiration. My preference is to set the expiration several months out and to close or roll the position a month before expiration.

A synthetic future mimics the characteristics of a stock, except it has an expiration date. The maximum profit is huge and the maximum loss is uncapped. It is short shares in everything but name.

I've never had occasion to open such a position, nor its cousin, the synthetic long future options spread (short put, long call, same price, same expiration).

And, as it turns out, it appears that I won't be doing so today. EWZ has lost its downward momentum and with 90 minutes left before the closing bell, it seems unlikely to regain it.

EWZ remains on the Watchlist, and if implied volatility remains middling and if downside momentum resumes, then I'll have a chance to try a synthetic.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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