As the gauntlet of poor tech earnings continued with Amazon.com, investors can consider using options as a superior alternative to shorting shares to express a bearish view on their least favorite tech stocks.
In this example, we will use downtrodden Snap, which fell over 28% after missing revenue estimates and providing a poor outlook.
With the stock bouncing but still below moving averages — down 78% year to date — there are few positive signs for the parent company of the Snapchat social media app.
Investors who expect further weakness in Snap stock could short shares. Nevertheless, shorting shares leaves investors with a significant margin requirement in addition to shorting fees. Not only that, theoretical losses are unlimited with a short sale.
In the Money Puts A Better Option
One way to better express a bearish view is by buying a deep in-the-money put. In the case of Snap, with the stock trading at 10, investors could buy the 17 put with a January 2023 expiry.
Buying the put costs investors $7 and has a break-even of Snap's current price of $10. With a delta of -95, buying this put is almost exactly equivalent to shorting 100 shares of Snap.
The simplicity of deep in-the-money puts is that they have minimal exposure to volatility, allowing investors to bet on the direction of shares, not on the volatility of the stock.
If Snap stock moves down, the put gains in value; if Snap moves up, the put loses value.
With a lower margin requirement and no risk of a short position being called away deep in the money, puts are a favorable choice (if options are liquid) to express a bearish view on a stock.
In addition, investors who buy these puts will also be paid the interest-free rate, which is intrinsically added to the options price. While this is of little importance for a trader shorting shares for a couple of days, for investors taking up long-term positions, it certainly makes a difference.
