Reverse investment in options, Short Selling Made Simple – Investing in Reverse

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Bear markets have been outlandishly profitable for investors who used the short selling technique. This report will provide the education needed to learn how to safely make profits. Please note: This does NOT involve the use of options, futures or any other kind of risky derivative! At best, they write a mildly positive-to-ambivalent research report that will leave the average investor in a state of inertia which means the stock remains unsold. And who needs the advice and services of an investment bank more than a struggling, downtrodden company?

Short Selling Made Simple – Investing in Reverse

Bottom Line: When you need to know which stocks are troubled and headed down, Wall Street is mute. A lot faster. Yet individual stocks routinely tumble by that much or more in a single day.

And you can. It would take five years of average stock market returns to get that kind of performance. Yet you can profit from plummeting stocks… simply… easily… safely… and effectively.

Updated Jul 8, What is a Reverse Conversion? A reverse conversion is a form of arbitrage that enables options traders to profit from an overpriced put option no matter what the underlying does. The trade consists of selling a put and buying a call to create a synthetic long position while shorting the underlying stock. This means the trade short stock and synthetically long the stock with options is hedged, with the profit coming only from the mispricing of the option premiums.

Short selling is simply acting to capitalize on falling share prices. And there are plenty of opportunities for short sellers… even in the hardiest bull markets. For instance, you may want to speculate that a stock is likely to decline. There could be any number of reasons.

Reverse convertible securities

You may feel that its sales have topped out, that earnings will fall short of expectations, that the company has too much debt or too many successful competitors, that its industry is in a slump, or simply that the shares are overpriced. Short selling allows you to take advantage of these situations without resorting to using options or other derivatives. While options can give you leverage that a short sale cannot, they have one very serious drawback: their time premium. That means when you buy a put option, unless the stock falls fairly substantially and within the relatively short time period defined by the premium, you may miss out on the profit if the stock falls after the expiration of your option.

You can hold a short position indefinitely. They do not expire.

Another reason to sell short is to hedge your existing stock portfolio. Perhaps you have a substantial percentage of your liquid net worth tied up in stocks. If the broad market declines, so will the majority of your stocks.

By selling short a few stocks, or even the market index, you allow the potential profits in your short positions to offset the decline in the share prices of the stocks you own. For example, if you have technology stocks you can offset the risk here by selling short the Nasdaqsymbol QQQQ.

An Introduction to Reverse Convertible Notes (RCNs)

These indexes consist of the best companies in America. We think you should be shorting just the opposite: the worst or at reverse investment in options the most-troubled companies you can find. In fact, often times investors will follow the strategy of buying the strongest stocks in an industry while simultaneously shorting the weakest ones.

That may mean buying Wal-Mart and shorting Kmart. Or buying Exxon and shorting BP. If you want to short Japan, the symbol is EWJ. Hong Kong is EWH. Switzerland is EWZ. Mexico is EWW. And so on.

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  • When you buy an RCN, you are actually selling the issuer the right to deliver the underlying asset to you at some point in the future.

There is a whole list of market indexes you can buy or short at www. Short selling is just reverse investment in options opposite. But to transact the sell, you must offer the shares up in the market.

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And you do that by borrowing them from your broker. In theory, he lends you the shares, so you can short sell them. Then when you buy them back, these shares are returned to your broker, completing the transaction.

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Second, because these trades are executed via a margin account, it is not possible to sell short in an IRA, Keogh or some other qualified retirement plan. You must sell short in a non-retirement account. So the first thing you would do is check with your broker to see if he has shares in his inventory to lend. However, not every stock is marginable or eligible to be traded through a margin account.

For instance, if a stock is not marginable, it cannot — by definition — be sold short.

Call Options Explained - Using Call Options to Generate Cash Flow

That precludes most penny stocks and foreign shares. They often feel that reverse investment in options shares are too risky to be sold short. What to Tell Your Broker to Short Sell Correctly After you have set up a margin account with your broker and have checked to be sure that you can borrow the shares you would like to sell short, you then read your broker the order or place it online.

If you do set a limit price, however, you will not get the order filled until that price is met. The order generally will be canceled if unfilled at the end of the day. Then you must enter the order again the following business day.

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So transacting a short sale is fairly simple. The Potential Upside from Short Selling: Faster Profits and More Opportunities Because stocks always go down faster than they go up, your profits could come much sooner. Another upside is that the whole market may be trending lower at times.

When that happens, the trend is your friend. Studies show that three-quarters of all stocks follow the reverse investment in options market trend.

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That puts the percentages on your side during a bear market. You can simply use your existing equity in your brokerage account as collateral.

Options contract adjustments: What you should know

Of course, your broker will charge you margin interest until you close out your position. The first is that, theoretically at least, there is no limit to how high a stock can go.

Not even close. Yet nay-sayers will interpret that technicality as meaning that there is no limit to how much money you can lose. Fortuantely, we know a good rule of thumb to generally avoid such losses.

What Are Stock Splits?

Never try to rationalize that the stock will eventually come back down. Being a successful trader means having an exit discipline and sticking to it. You can always short a stock again if it begins moving down. This is a rare occurrence but it can happen, especially if a stock is somewhat thinly traded.

In such an event, you have no recourse: you must buy the stock back regardless of whether you are in or out of the money.

Reverse Conversion

It is also important to know that short sellers are responsible for any dividends paid. That is not simply a windfall to short sellers. For this reason, it is often wise to avoid high-dividend-paying stocks unless the fundamentals are truly atrocious or the dividend itself is in jeopardy. The Best Selling Short Candidates: Fundamentally Challenged Companies The approach most short selling advocates take is pure guesswork — they have a hunch that the overall market is going down and so they short Dow stocks or they believe a certain sector is overvalued, and they advocate shorting the leaders in that sector or they short companies that are simply too expensive.

Our approach is vastly different. The more intractable the problems, the better we like the odds.

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Industry overcapacity, like any number of stocks in the crashing computer bubble a decade ago. Industry-wide image problems, like the type that hit oil companies after the recent BP rig explosion off of the Louisiana Coast.

Perceptions of potential fraud or abuse, as in the case of any number of big banks in intoas they spent large way to make money at home of money on company getaways and other expenditures that the public took issue with. Within weeks, shares of the combined companies lost more than a third of their value.

And these are just the high-profile bombs. The list could go on and on.

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Anyone who has run a business knows that there are endless ways for things to get off track. But the bottom line is that things happen, whether they be mistakes or more duplicitous errors. And when they do, smart investors know how to take advantage. Good luck and good short selling.

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