Should Investors Consider Put Options or Short-Selling or Both For Laggard Stocks?

This is an interesting question many investors have: how to gain exposure to a stock that one believes is vastly overvalued by Mr. Market at any given time? A number of resources are available to investors who have opted for the ability to purchase derivatives which can provide different payouts depending on how a stock moves over a given time frame.

A primary distinction an investor must make when considering either put options or a short position in a given stock is the time horizon the investor has with respect to the underlying company and its impending decline. If an investor believes the timeline for a given stock’s decline is limited to a certain number of weeks or even months, put options can be one way to get a large amount of exposure to a given stock’s downside in a short amount of time for relatively little money.

That said, if an investor believes that a company’s decline will be gradual, or the reason for such a decline is cyclical or industry-related, it may make sense to simply short the stock and be patient, giving the market time to revalue the equity portion of the business in question toward its intrinsic value.

The sophistication of options and options-related strategies make investing in such instruments very risky and potentially dangerous for investors who are still learning about how to use these tools. Best advice: research the options available to you before investing and consider the benefits of long/short strategies and options strategies carefully before making a decision.