Learn How To Short the Market With UVXY
On June 5, 2013, the market dropped 200+ points but I know a trader who made $5,000 from it! In this lesson you will learn how to short the market even if you do not have a margin account.
Short Market Definition
Shorting the market means that you are betting that the market is going to drop.
The mechanism behind shorting the market is quite ingenious. You sell stock that you borrow from your broker under contract that you will buy it back at a future point in time. Your opening trade is called a short sale and your closing trade is called a buy to cover. The idea is to buy to cover your short position at a lower price than what you originally sold the stock at. You pay your broker back for the stock and a small margin loan fee, and you get to keep the difference.
When you short a stock you are selling what you don’t actually own thus you are borrowing it from your broker. Because you are borrowing stock that you do not actually own, you must have a margin account to short a stock.
How To Short the Market in Etrade Pro
Etrade Pro has a very simple interface for shorting the market. Simply enter in the security you want to short and click the “SHORT” button:
This will initiate a short position in whatever stock you enter in the Symbol field. When you are ready to exit out of the short position, you will enter the ticker symbol and the number of shares you originally shorted, and click the “COVER” button:
Frequently Asked Questions about How to Short the Market
What does short the stock market mean?
Short the stock market means to bet that the market will go down. Shorting the market is the act of borrowing shares from your broker to sell and get paid now, with the contractual obligation to buy the shares back at a future time. You get to keep the difference between the price you originally sold the shares at, and the buy to cover price when you close out the trade.
Alessio Rastani posted the excellent video below called Selling Short – How To Profit From a Stock Market Crash.
What is short selling in the market?
Short selling in the market is a measure of the amount of traders who are shorting the market or betting that the market will go lower. A high level of short selling means that the market will go lower and Bears have the advantage. A very low level of short selling probably means that the market will go higher and Bulls have the advantage.
OlinBusinessSchool of Washington University in St. Louis posted the enlightening video below from professor of finance Matthew Ringgenberg called Short Sellers: Villains or Visionaries?
What is a short squeeze?
A short squeeze is when a heavily shorted stock does a big move up the chart, forcing an increasing number of short sellers to panic and race out of the stock all at once. The term short squeeze means that short sellers are feeling increased pressure to exit their short positions.
James Altucher and Jim Cramer talked about how Cramer’s hedge fund back in 1999 and 2000 sold short stocks. They then go into a discussion on how to play short squeezes. TheStreet video is below.
What is a naked short?
Naked short selling is illegal. Naked short selling is the practice of short selling shares that do not exist. In a normal short sale, a trader borrows actual stock before they sell it short.
For example, let’s say that company ACME has issued 100 million shares and that is reflected in the market cap of the company. There are 100 million shares of that stock in existence. Some is in the hands of the company itself, some is in the hands of institutions, and some is in the hands of retail and individual investors.
A naked short seller will come in and sell a million shares of ACME stock that is not recorded on anyones books. The shares are not part of the market capitalization of the company. The shares did not come from an institution or individual investor. They are simply made up shares created out of thin air and sent to the floor of the market exchange. This pushes the price of a stock down because the market specialist doesn’t know the difference between these counterfeit shares and actual shares.
Marcchabotyt posted the video below where Max Keiser and Stacy Herbert talk about the illegal practice of naked short selling.
Short Stock Market
You can make money when the market goes down by shorting stocks. Lots of new traders do not want to deal with opening a margin account and learning how to short sell a stock. No problem. There are other ways to make money when the market goes down.
One of the top traders on Wall Street, Jason Bond, uses UVXY as a quick scalp to make money on a falling market. UVXY is the ProShares Ultra VIX Short-Term ETF. You can buy it just like you would any other stock. ProShares handles the short selling on the back-end so you don’t need a margin account to short the market. This is a very simple way to bet on the market going down.
A big word of caution here, if you search UVXY on Stocktwits you will find a graveyard of traders who tried to time the market swings using this ETF.
In the video lesson below, I examine short selling the market and Jason Bond’s winning trade in UVXY. We will study the daily chart and watch the 1 minute chart in real time to better understand how one of the most popular traders on Wall Street made over $5,000 on a day when the Dow dropped 200+ points. Finally, you will hear from Jason Bond himself as he teaches how to buy support and sell resistance.
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