When you buy puts on a stock that is breaking down, can you sell short as well, using the buy point for puts as the point to sell short? (March 18, 2002)

  What we do in buying and selling options is based on the movement of the underlying stock. We always look for stocks in a good pattern that shows either accumulation (upside plays) or distribution (for downside plays); if the stock makes the move, buying or selling the right options will allow us to benefit from that move using the leverage of options. As we base the option play on the actual movement of the stock, we can buy or sell the stock at those points as well. Now with selling short, you cannot sell when the stock breaks down. There is a rule in short selling that you have to sell on an uptick; that helps keep sellers from just piling onto a stock and driving it into the dust. It does not always save the stock, but it makes things more orderly. So, if selling short, it is good to watch for the breakdown and then the test of that level that it broke through. That means watching it move up and hit the level and fail. Then put in your order to sell it short. It may take another session or two to get the test if it was just a 'normal' breakdown, i.e., not prompted by some accounting worries or other kiss of death news the market is focusing on at that time. Buying into a move after a test is always the less aggressive of the buy points: you see the breakdown, then the fight to recover. If that recovery fails, then the drop is pretty fast to support.


Previous Page Next Page

Return to Table of Contents


Legal Disclaimer