Short positions are alternative for investors in periods of continuous turndown of all kinds of assets. They are well-known on the developed markets and it is not by chance that during the past year the short funds were among the most profitable in the world. However, for investors who trade on the international market, we are going to make clear some crucial moments of the short positions.
A short position is the selling of shares that you do not own. You borrow them from someone, from whom exactly, it is not your concern. The essence of this operation is the price of a certain asset that you have shorten, and at a future moment you buy them at a significantly lower cost, which actually forms your profit.
There are several things that you should know before start to sell:
- You have to determine what part of your portfolio will be allocated to short sales. Although you sell assets that you do not possess, the principle is the same as with a purchase, and your broker blocks the funds for a deal.
- Consider the way you make the shortening. The short sells are considered to be relatively risky, because the losses there are with unlimited size. When you buy shares the maximum that you could lose is its value or 100% of your capital, while a rise in short selling can bring you much more losses. Perhaps it is better to use buy with put options, which also bets on turndown in the price of the underlying asset, but you risk only the money of the purchased options.
How to estimate a good opportunity for short positions:
- Once you identified and followed the price of an asset, one of the best moments to enter the short position is when you hear bad news for a particular company, segment, or major competitor.
- Combine the time of the bad news at a micro level with bad, short-time prospects for the overall market. This would guarantee you a high level of security.
Be careful with the time factor. It is not on your side when you buy options. Movement of 10% down of the underlying asset does not guarantee you a profit. The bad thing about options is that they implement premium, which disappears with every single day. At the end of the maturity of the option, that premium melts maximum and it can take all your profit. You should choose your options wisely, consider their maturity in addition to your expectations about the price movements.
Investors tend to rush with the clearing of their positions. Unfortunately this is out of the picture when it comes to the opposite case. When investors profit something, which should be enough to cover the premium (with options), or the price of the asset decreases slightly, many of them tend to close their positions. Unfortunately, when they lose, despite the set targets for exit or the stops, oftentimes they wait to cover their loss, which actually can lead to irreversible ones.
Finally, remember that there will be always another good moment to sell and the market will be still there. Do not hurry, do not trade at any cost, be disciplined.