Benjamin Frank 2.0
Frank 2.0
Jr. Member
Posts: 1,303
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« on: March 26, 2024, 12:37:13 PM » |
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« edited: March 26, 2024, 12:45:54 PM by Benjamin Frank 2.0 »
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If anybody wants to bet against this, the way to do so is not to sell the company short, your losses are potentially limitless if you do that,
If you sell short the stock when it's trading at say $10, and it goes up to say $30 in a couple days, you have to 'cover' that short by putting additional money up. This is called 'covering a naked short.' When a stock goes up very quickly, it can be hard to get out of the short.
as John Maynard Keynes said "The market can remain irrational longer than you can remain solvent"
The way to bet against it is to buy an option/derivative called a 'put.' (There are puts and calls.) A derivative is a way to place a bet on the underlying stock/security, hence the option 'derives' from the actual stock/security and is called a 'derivative.'
Buying a 'put' on this stock allows you to sell it at a set price for a certain period of time. So, if the stock price does not fall below the set price on the put during this period of time, you lose what you bought the 'put' for, which is usually just a few cents per 'put' option (but you would probably buy several hundred 'put' options), but if the stock declines below the set price, you can make a fair deal/a lot of money. In this way, derivatives are said to 'leverage' the market.
As Archimedes said: "Give me a lever long enough, and I can move the earth."
Of course, if after buying the 'put' and before it expires, you don't feel the stock price will fall below the set price, you can sell the 'put' but, presumably for a loss.
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