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Comment by the__alchemist | Hacker News Reader

Can someone explain why puts make sense over shorting? For example, I'm betting against 5 quantum computing companies with short positions. I considered adding puts to the position, but it didn't make sense based on 2 reasons: High bid ask spread, and if it's a fraudulent company/otherwise worth betting against, the volatility will be high, so you option costs too much compared to the upside; the amount it has to drop to break even is too big.

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With a put, you can only lose what the put is worth. With shorting, you can in theory have infinite loses.

Yea; true. My thought when evaluating these was "I am confident the price will drop significantly within the next 6-18 months. But if I screw up the timing, or it drops to 1/3 the value instead of 1/2 etc, I lose money or break even. While I'm reasonably confident the normal short will pay off, since I don't have to nail the amount or timing.

With shorting, you run the additional risks that you could lose the borrow and be forced to buy back at any time. Or get margin called if the price moves against you. With puts, you have to get the timing right, but no external factors can force you out of your position.

Even if you're right, but the value goes up before going down, you can lose out with a short, if your counter-party makes a call for collateral you don't have.

> With shorting, you can in theory have infinite loses

This risk can be hedged with futures and options.

Agreed. But it adds complexity.

Sometimes you just want simple leverage, which the puts can provide.

Congratulations, you just invented the synthetic put.

> you just invented the synthetic put

Short and a call, yes. Short and a future, no. Either way, infinite losses isn’t an unavoidable downside when it comes to shorting. Stock-borrow and margin risks are.

> Can someone explain why puts make sense over shorting?

Leverage, margin risk and stock-borrow risk. (The last refers to the folks who lent you the shares recalling them inconveniently.)

Derivative markets are almost always there to provide leverage. Yeah, thinly traded options are a significant downside. If you can get in and out of the contracts, you can always combine options to remove some of those volatility costs by selling as well as buying, ie, spreads and ratios.

Options are just that - an option to transact at a certain price, if you choose not to you're just out the premium you pay. Short selling involves an obligation to return the shares, which has (theoretically) unlimited downside.

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