Apple after hours are down 6%. Analyst do not like the short term stock growth prospects.
The iPhone numbers missed expectation, and as Apple's main product it didn't look good. http://www.businessinsider.com/apple-q1-earnings-2014-1
EPS, Mac and iPad all did well.
Analysts' expectations were not in line with reality. The iPhone numbers are what they are, irrespective of incompetent analysis.
A fairer way to state this would be that analysts, as usual, were over-optimistic and this optimism caused a lot of investors to be overly optimistic too, which caused an over-inflated share price, now corrected.
In reality, you "short" a stock by purchasing a Put option. For example, these are made up numbers, but if you thought Apple would tumble on earnings and wanted to short it, you'd buy, say, $525 put options. This is a contract to sell 100 shares of apple at $525. It's worthless if they trade above $525 but if it drops below, you're in the money.
Suppose you pay $150 per contract, and you short 1000 shares -- 10 contracts. The most you can lose is $1500. And if the stock tumbled down to, say, $475, you would make $525-$475 = $50 * 1000 shares = $50,000, or $48,500 profit.
But the most you can ever lose is what you paid for the options.
Taking a short position on a security is a strategy.
Buying Puts is a tactic. Short Selling is also a tactic. Both accomplish the same goal of holding a short position -- making money when the price drops.
If you want to take a short position, you can buy Puts. And to wit, if you're a retail investor wanting a short position, this is most often how you'd do it.
Trading the derivitive here is a smarter play for precicely the reason I mentioned: It limits risk. Liquidity on the options market doesn't matter at all because if the price rises, your Puts are worthless anyway. And if it drops, you don't need to sell the contracts, you can execute them (on margin if necessary) and unwind the position that way.
"Going short" a security has a very specific meaning in the equities market. Same with "going long".
And buying puts is NOT the same thing. You've completely forgotten about the concept of premium and time value when pricing an option. For one thing, options are sold at MANY price levels (strike prices) and expiration dates.
Seriously man, with all due respect, you're so mistaken its scary. One of my colleagues designed the NYSE trading network and back-office trade clearing systems. This is how I earn my living. I'll bet you your 401(k) you can't get a floor trader to endorse that explanation you just gave. It's so wrong that I'm only commenting to give other people a chance to learn from your mistake.
Guys like you are how guys like me make money.
Here's the pricing for a put option on AAPL to sell the stock at $450. Expiration 16-Jan-2015 (roughly one year from now):
40.11 Down 3.09(7.15%) Jan 27
http://finance.yahoo.com/q?s=AAPL160115P00450000
That price is per share. So, for roughly $4011, you can buy the right to SELL 100 shares of AAPL between now and Jan-2015 for about one hundred dollars per share LESS than what it's closing price was yesterday. Figuring in the premium, that's about $140 loss per share built into that trade yet there are 1300 OPEN contracts for just that. By your thinking, those puts should be worthless, right?
Moreover, there are already ~1300 OTHER put contracts out there at this exact same strike/expiration. What was the volume yesterday in those contracts?
15. Fifteen fucking contracts.
Hey...what about at $550 strike? 12 contracts.
Liquidity and premium are important. A lot of the time liquidity is the MOST important thing. It doesn't matter what price someone else got if you can't get that price because there isn't a counter-party to trade with.
You can't buy what someone else isn't willing to sell and you can't sell what someone ain't buying.
For one thing, a put (or call) option doesn't even trade on the same markets (usually), has a lot less liquidity (usually), and depends on the supply of people willing to write contracts against positions they already hold. (non-naked) Options also have the effect of limiting any possible loss to the price paid for the option.
When you short a stock, your loss is potentially UNLIMITED. In practice, your broker will buy the stock for you with whatever cash you have on hand if the price moves against you.
That doesn't happen with options but you also don't get the huge sums of money to play with by borrowing against a stock that you don't own but are positive will dive into the dirt.
edit: explanation.
The price of that uncertainty is what you capture in the options pricing model. aka. "premium"
Two scenarios:
(Short-selling) AAPL: Sell 10 lots (1000 shares) short -> now you OWE someone 1000 shares but have the cash in your account of 1000 shares worth of AAPL stock. The next day, AAPL loses 99% of its value, you buy the shares back at their now 1% value, deliver them to the person you borrowed them from, and keep the rest of the cash in your account. OR, the next day, the shares DOUBLE, and now you owe that person shares that are worth twice as much as you got selling them in the first place. Bad news. Nearly 100% loss on the trade.
(Buying a Put Option) You buy 10 AAPL PUT contracts (100 shares each) "at the money" (strike price equal to the last sale of AAPL) for $XX that expire at some point in the future (lets say one month). Anytime between now and then, if the price of AAPL doubles, your PUT OPTION may most-likely will be worth more than what you paid for it and you can sell it for whatever the market wants to pay for it. If you do nothing, at the end of 30 days, your option is worth exactly ZERO.
The difference in the price movements of the underlying securities in both scenarios is what makes up the premium you pay OVER AND ABOVE what the difference is between what the security trades at and the price you paid for that "option" on the security.
e.g. short a low beta stock, hedge that position, short the higher beta stock, and hedge that position.
That just sounds like gibberish TBH...
Just buy and hold.
But my point still stands: it's trivial to create a synthetic short position that's dollar neutral.