I've only been studying the long side of investing. However, with so much market weakness, it is tempting to try my hand at shorting. Does anybody here have any good shorting ideas or strategies that I should look into? What kind of stocks do you look at for shorting? I know low volume rallies into the major moving averages are good areas, but I don't know much about the technical weakness indicators... Help!

Shorting stocks can be very rewarding and it can also be quite costly. O'Neil wrote a book (available at Amazon).. "How to Make Money Selling Stocks Short". You have to ask yourself if it is worth knowing more or less about shorting stocks before you actually try it. Having said that, right now the bulls and bears are fighting it out. Who will win? There is a lot of downward pressure today but volatility is also very high - VIX above 30. This means the indexes could just as easily go up a few hundred points in one session as they can go down. At the moment the spx is up 22 points which is more than two standard deviations.  We need more time. One of the dangers with shorting is when the markets are crashing the gov't is likely to change the rules overnight and this can cause your open short position to lose big on the open the next day. Day trading short positions is one way to protect yourself. Another, less risky way to play the downside is to put on out of the money butterfly positions. These can be very cheap and offer a quick way to realize sizeable gains if you know what you are doing.

What's a butterfly position?

A butterfly is strategy using options.  It can be bullish, bearish, or neutral and can be constructed of all puts, all calls or puts and calls.  Let's say, for example that you are bearish on BP.  At the moment there are only 8 days remaining until June expiration so we look at July.  We think BP could be 25 by mid July so a possible position may be to buy 1 jul 30 put at $3.35, sell 2 jul 25 puts at $1.99 and buy 1 july 20 put at $1.12.  The net cost is around $.45 for a 1 lot or $45.  A 10 lot will cost $450.  You will risk $450 to make $500.  You can of course limit your loss by closing or adjusting and you can settle for a smaller gain - say 30-50%.  Shorting the stock will cost much more and the risk reward is far less favorable than with options.  There are an infinite number of ways to structure the risk / reward at the onset and an infinite number of ways to play the position once you are in it.  One of my favorite plays is a short term out of the money butterfly where the cost is cheap but the reward has the potential to make 50-100% in less than 10 days. 

GS was at 137 on Jun 9.  The atm vols were 45.  Thinking gs may sit still for a few days I put on a small June 140/135/130 put butterfly for $1.06 debit.  2 days later gs is at 135.3 and the position is worth $1.33.  20% gain in 2 days.  This will come off today or Monday as I try to hold on for 40%+ return.  Time bomb butterflies can work.

What type of exit points do you have with those positions? From your previous post, I gathered your price target on the upside is 40%...what is the downside risk? For example, on stock purchases, Bill O"Neil cuts all losses at 7-8%. I know options are quite a bit more volatile than stocks, so is it like 15% loss limits?

Good question. Options are indeed different than stocks. To me the exit point depends upon the strategy and the plan, both predetermined before the position is initiated. On most strategies where I allocate 10-15% of capital each month the planned profit may be 15% with a max loss of 15% however, I would try to keep the position delta neutral as much as possible by making adjustments. A lot depends upon the number of days till expiration and the speed of the move. Smaller positions such as the butterfly mentioned for GS would take 1-2% of capital and be cheap enough that a 50% loss would not hurt the overall monthly return. These smaller positions are more like speculative plays. I have seen some traders with 100-200% profit in less than 5 days with the time bomb butterfly lately. Each month is a new game so to speak. Old positions are closed are let expire and new positions are put on for the next month. I try to be in cash as much as possible - avergae trade will last 17 days. Lately the days in the trade have extended due to the high vix for the larger positions.

Rick, would you opine on a position long CRUS @ 17, long July 17.50 CRUS puts @ 1.60 , please.

Thanks in Advance

Rhino.three - buying naked long puts or naked long calls is a suckers game - long term.  you may get away with that for awhile but eventually you will lose more than you make - unless you have inside information.  If you know the options for that long put are mispriced then maybe you can win.  current bid/ask is 1.45 / 1.55.  This is a $.10 spread or 15% right off the bat.  In other words if you buy this put for 1.55 you will be down 6% as soon as the market sells it to you.  Why?  because you can only sell if for 1.45.  Never buy at the bid or sell at the ask - you want a discount or maybe 1.50.  This jul 17.5 put has already declined $0.85 today.  The open interest in this put is 565 contracts which is illiquid - 487 of those traded today.  Total open interest is 33,372 and 14,226 were calls that traded today against 1,988 puts.  Most CRUS traders are bullish at the 15 and 17.5 call strikes.  The implied volatility is 64%.  That put for $1.50 has 1.05 of time premium in it making it quite expensive.  The expiration breakeven is 15.95. 

if you are so bearish at this point in CRUS and expect it to drop in the next 3-4 weeks then consider selling the jul 15 call and buying the 17.5 call.  This bear spread is $1.50 credit at the mid price and will cost $100 in margin with an opportunity to make 50% by expiration.  Another is to buy the 17.5 put and sell the 15 put for 1.03 debit or $103 in margin with opportunity to make $44 at expiration.  You always want to trade options as spreads - it lowers the playing field for retail traders and mitigates some of the effect of volatility.  The big problem with any of these is the fact these are so illiquid.  Cal it the roach motel - easy to get in but very tough or expensive to get out.  Positions like this in inexpensive stocks require low commissions - at least $0.50 per contract.

Most of the options I play have underlyings that are over $100 - AAPL, CME, MA, GOOG, IBM, OEX, SPX and the RUT.  These are liquid, lots of strikes and lots of alternative strategies can be played with them - month after month after month.  I do look at and trade options in vehicles that are less in value but they represent a much smaller percentage of my portfolio. 

Rick- Thanks...I was bullish and got long CRUS and hedged w/ puts ITM July, and prolly overpaid for them.

How might I more effectively manage a LONG in CRUS ? Sorry if the previous post was imprecise.

how to manage the position from here depends upon what you want to do.  protect gain with more upside potential?  what is the price target and in what time frame?  if you want to accumulate more shares but think the price is too rich then sell naked puts - for instance the jul or sep 17.5's - this is the same as selling calls against the stock.  you could close out what you have and buy a dec 12.5 call and sell the jul 17.5 call against it - the downside is protected until 16.5 and you can possibly make 10-12% in the next few weeks and by then if the position is still working you can buy back the jul 17.5 calls and sell the august 17.5's then the sep's then the oct's.....

another strategy is to sell the jul 17.5 put and buy the jul 17.5 call for $0.55 credit or $560 in margin.  This is the same as buying 100 shares long at 17.5 except it expires in july.

There are an infinite number of options available to structure whatever you want to do.  CRUS options are illiquid though and you have the potential to lose much in slippage.

good luck!

Rick- I appreciate greatly your insight. Originally I was intrigued by the butterflies you described for bear case scenarios, and wondered whether there was a corollary I might invoke bull case for CRUS. My acquisition yesterday of long Cirrus Logic involved utilizing my observation that my prior put buys result in a downtick in the underlying. I bought the CRUS puts and lay dead for the common to fall onto my bid. Now that I'm long and hedged, I guess I'd like to reduce the price of the hedge, maybe sell a put below the 17.5 I own. Maybe even sell a call to further reduce my cash out-of-pocket. The strikes and expiries most advantageous are TBD. The spreading I have seen illustrated by the talking heads involve put spreading and call sales.

I'm also intrigued as to your advice in not buying the offer. When I place a bid, inevitably the MM's match me up and down the exchanges, and I get no fill. To what do you attribute your success at fills below the ask?

rhino

Reducing the price of the hedge by selling puts below your long strike can work.  That is legging into the spread and in itself can be risky.  For instance - the 17.5/15 is 2.5 points wide, it currently is priced at .88 - by legging into it you risk paying more for it - but then you may also get less.  You have to time it according to your technical analysis.  Now it is .90 as crus is up .42.  (8:50:21 CDT).

Options prices are determined by the theoretical models the market makers use as well as supply and demand.  A fair price (theoretical) is somewhere around the mid point between the bid and the ask.  With liquid options say AAPL jul 280 put bid 14.7 ask 14.8 you can place a limit order to buy it or sell it at 14.75 and have a good chance of getting filled.  With less liquid options if it is 14.7/14.8 and you place a limit to buy at 14.75 the ask may change immediately to 14.9.  You have to be patient - enter your limit and wait - you can also direct the order to a particular exchange if your broker platform lets you.  Market makers like spread orders because it is easier for them to hedge on a two way trade so the fills are much much better.  In many cases when closing a spread I like to choose my limit price and then let the market come to me and fill at MY price.  Feel free to contact me outside this forum at spec875-d@yahoo.com