Shorting stocks can be very risky if you borrow and sell the actual stock since a stock can theoretically rise an unlimited amount, while your upside is limited to 100%, and certain stocks are hard to borrow (depending on your broker and the specific stock).
Instead, my recommendations will consist solely of puts. Puts allow you to make money when a stock goes down without actually owning the company – which, of course, significantly reduces both your expense and your risk.
Buying puts is an options trade, so you’ll need to open up an options account in order to do it. You can learn more about how to open your options account here.
I like to use options to short stocks because doing so is more capital-efficient and limits losses to the amount paid for the option. Using options eliminates this risk as well as the problems that arise in shorting hard-to-borrow stocks. Plus, options are leveraged – which magnifies the potential profits.
Different brokers will have different criteria for approval levels, so talk to yours – but in general, you should not need more than a level 2 clearance to buy puts (you can learn more about getting approval to trade options here).
SHORTING VS PUTS
|Reward is limited||Reward potential is virtually unlimited|
|Risk is virtually unlimited||Risk is limited to premium|
|Requires a higher clearance level||Requires a lower clearance level|