For the first part of the year, the markets have been nothing but higher. Every major index has pushed off the December decline and rallied straight up, mostly back above their 200-day moving averages. Many traders are starting to think about protecting against a downside move or simply looking to try to profit from any pullback. Today we'll cover a few ways you can short the markets should you feel the same.
The first and easiest way, but also the most capital intensive, is to look for a market ETF and simply short it. This will require you trade on margin, which involves its own risks, so be sure you understand that before continuing. Try the popular S&P 500 ETF (NYSE: SPY), or Nasdaq 100 ETF (NASDAQ: QQQ). Shorting a stock or ETF means you are borrowing shares from someone else and will promptly sell them. You then hope to buy them back cheaper before returning them to the original owner. Thankfully, with technology these days you simply hit the sell button and the rest is taken care of for you.
Shorting the index ETFs is considered the most capital intensive because of the current price of the indices. The SPY is currently trading around $275, so if one were to short 100 shares on standard margin, one would be looking at over $13,000 in capital required.
Another way to short the market would be to buy inverse ETFs. This may sound a little odd, but there are ETFs out there that realize not everyone can short the markets, so they do it for you. An inverse ETF will move opposite the direction of the underlying index. For example, if the S&P 500 were the index you wanted to short, you could simply buy (NYSE: SH). A drop in the S&P 500 would result in the rally of the SH. Note: Before acting on an inverse ETF one should better understand the costs associated, especially on leveraged, inverse ETFs.
The final way to short the market is simply to buy puts. Buying a put is an options trade wherein the value of the put will rise as the markets fall. Timing is key here, as the option will expire, so you will want to be confident. These can also be used as a form of insurance against a portfolio. If the market never falls, however, you still pay for the insurance.