Sell Stocks Short'; October 28, 2008

OPEC cut oil production last week and after today’s upswing, the timing looks right to be shorting the airline sector.

I have never been a fan of airlines and it is no different. The most endearing qualities about airlines are that they are badly run, have lousy on-time records, even worse customer service. Throw in a host of union problems and the fact that avgas is their biggest expense and you have a proven formula for non-profitability.

I am looking to short AMR (stop @ 13); DAL (stop @ 10.50); UAUA (stop at 16). I am looking to first borrow the shares or I’ll buy put options if I need to.

RAC
The Intelligent Trader

The Intelligent Trader; October 8, 2008

Sell Stocks Short 100808

From: JM

I don't believe in this market and I am now more confident that we have a long ways to go. I made some smart moves a couple weeks ago by buying put options against a few of my long positions, but I was silly to get out of them early. I think put options against the longs rather than straight short positions might be the best strategy in this down trend because the chances of a market correction to the positive is much greater than normal.

I might be able to come by tonight or tomorrow. I also need to build a longer term strategy so I can be prepared when the market has fully turned. Good things will come sometime and I need to be able to take full advantage.

To JM:

You made an interesting point in your email.

Put options are used in a variety of ways. The 2 most common are as insurance and synthetic shorts.

The notion of using protective puts against current positions is a good one in a sideways or down market. It's best to use this strategy when the indicators indicate defense and the market moves into the principal preservation mode.

The key to success in using protective puts is to (1) set a stop loss level - this is the zone in which you are willing to sell your stock and (2) use time as an asset

for example - GE which is one of the stocks you own. Current price is $20.80

The strategy would be to buy the 17.50 Jan09 puts - when you buy a put option as insurance (i.e. protective put) you either let it expire worthless or exercise it. The one thing that you don't do is to trade it out at a profit.

Protective puts are designed for investors who's holding period is a number of years. I am not an advocate of protective puts because I use stop losses directly and have no problem getting out of a name that is not working.

The other strategy is trading puts and using them as synthetic shorts. This is the method that I use most and do this as a way to take on a short position without the hassle of buying borrowing the stock and having to deal with the margin requirements of the trade.

RAC
The Intelligent Trader