Short Selling vs Put Options: Key Differences

Two Ways to Bet Against a Stock

When you believe a stock will decline, you have two main approaches: short selling the shares directly, or buying put options. Each has distinct characteristics that suit different situations.

Short Selling Characteristics

Advantages

• No time decay - position can be held indefinitely
• Profits increase linearly as stock falls
• No premium cost (though borrowing costs apply)
• Can be closed at any time during market hours

Disadvantages

• Unlimited loss potential if stock rises
• Margin requirements tie up capital
• Borrowing costs can be substantial
• Risk of forced buyback if shares recalled
• Dividend payments owed to lender

Put Option Characteristics

Advantages

• Maximum loss limited to premium paid
• No margin account required
• No borrowing costs or dividend obligations
• Leverage - control more shares with less capital
• Can profit from increased volatility

Disadvantages

• Time decay erodes value daily
• Premium cost must be overcome to profit
• Limited liquidity on some ASX options
• Requires correct timing, not just direction
• Options may expire worthless

When to Use Each Strategy

Choose Short Selling When:

• You expect a gradual decline over time
• Borrowing costs are low
• You can monitor the position closely
• You have adequate margin capacity

Choose Put Options When:

• You expect a sharp decline in a defined timeframe
• You want to limit maximum loss
• The stock is hard or expensive to borrow
• You want leverage on your bearish view

Cost Comparison Example

Consider a $10 stock you believe will fall to $8:

• Short 1,000 shares: $10,000 proceeds, target profit $2,000, risk unlimited
• Buy 10 put contracts (strike $10): Maybe $500 premium, target profit $1,500 ($2,000 - $500), max loss $500

The put offers better risk/reward if correct, but loses 100% if wrong on timing.

Other Bearish Instruments on the ASX

Beyond short selling and put options, the ASX offers several other instruments for investors seeking bearish or hedging exposure:

SPI 200 Futures (ASX 24 Code: AP)

S&P/ASX 200 Index Futures (SPI 200) trade on ASX 24 under the code AP. These allow you to take a bearish view on the broader Australian market without shorting individual stocks. SPI 200 futures are highly leveraged and trade nearly 24 hours on weekdays. For full contract specifications including tick sizes, margin requirements, and expiry dates, refer to the ASX 24 product page.

ASX 200 Index Options (XJO)

XJO options are European-style options over the S&P/ASX 200 Index. Buying XJO put options provides downside protection on the broader market. Unlike equity options, XJO options are cash-settled — no shares change hands at expiry. Contract specifications are available on the ASX website.

ETF Options (e.g., STW)

The SPDR S&P/ASX 200 Fund (STW) and other ASX-listed ETFs have quoted options available. Buying puts on STW provides similar broad-market downside protection to XJO options but with American-style exercise and physical delivery. The ASX publishes a full list of ETFs and securities with quoted options.

Each of these instruments has different contract specifications, margin requirements, liquidity characteristics, and tax treatment. For detailed specifications, refer to the ASX derivatives product pages.