quote:
We are a smart bunch of people here. Making shorting illegal is a set-up up for a crash, and I want to be short for a crash. So, we need to figure out how to make money from a crash that doesn't involve shorting stocks. I haven't thought about it yet, but I will on the way to work. This will be the official thread for ideas of how to make money on a crash without being able to short.

Here's a position that is sort of like a short position:

LONG 100 Shares XYZ
SHORT 1 XYZ CALL at a very low strike price
LONG 1 XYZ PUT at a very high strike price

The strike prices are chosen so the proceeds from the sale of the call pay for the put.

So, as an example, say you buy 100 sh XYZ at $5.00 a share, sell a call for XYZ at a strike of $3.00 and use the proceeds to buy a put for XYZ at $7.00 strike.

If the final price falls in between 3 and 7 bucks, both the call and the put are in the money. (7 - V) + (3 - V) + V - 5 = 5 - V
So if the final price falls in between 3 and 7 -for a dividendless stock, the result is the same as if you had shorted. For a stock that pays dividends - since you actually own the underlying, you'll be receiving them instead of paying them.

If the final price falls below 3, (7-V) + V - 5 = 2
Above 7 => (3-V) + V - 5 = -2

So unlike a true short position, your loss and gain are limited.

Its counterintuitive that you can mimick (though not precisely) a short stock using a position that has a long stock in it. The way I think of it though, is that the short call and the long put are both contracts, which if both are exercised, result in you selling the stock. So the two options represent 2 sales and the long position represents 1 purchase = 1 net sale.

This post was edited on 9/19/08 at 11:23 am