What are the short selling risks and how are short stocks like merit?
Many stock traders know how to go long, but they are afraid of stock shortages, thinking it is risky. Short selling is a very good strategy in a declining market. Just like any other stock trading strategy, you should know the risks and learn how to manage it before you consider making a profit. If you can do this, you can make a fortune to short the stock
So, what is the risk of a stock shortage? The first risk is theoretically, your potential loss can be infinite. The stock price can be reduced to a maximum of zero, but not below. But, at least in theory, stock prices can rise to infinity. Thus, in the case of a stock shortage, potential losses could be real if the stock price starts to rise and rise. Of course, it does not reach infinity. This is unrealistic, but your loss may be high. You need to learn how to manage this potentially huge risk of loss.
Other risks inherent in shorting the stock are known as "short squeeze." It happened when the stock fell and suddenly turned and started to rise again. This could happen in a sudden news about a good income report or the company's research department, which suddenly turned to a major breakthrough in the release of the market.
When this happens, if there are many short sellers, they want to go out as soon as possible. No one expected such a good breaking news. But now happens, the best thing is to quit. When everyone tries to exit at the same time, this introduces a short squeeze, with so many buyers eager to buy back the stock, the stock price will naturally go higher and higher.
So how do you manage these two short selling risks? By using an options trading strategy, you can reduce the risk of short selling. Buying a CALL will give you protection, limit your risk, and offer natural stops. The CALL in the underlying stock will confidently let you go empty and take advantage of the declining profit potential.
The second advantage of this CALL option strategy is that you can scroll your position as long as you want. So if the July call is about to expire, but you still want a short position open, you can sell the July CALL and buy the October or January CALL.