With U.S. indexes a stone’s throw from record heights, you may be wondering why you should even fuss with short selling stocks. The answer is two-fold. First, there’s always a bear market somewhere. There are always winners and losers — even in the midst of one of the greatest bull markets of all time. Isolated pockets of weakness provide opportunity for options trading with a bearish tilt.
Second, adding bearish trades to a bullish portfolio is a smart way to reduce risk and smooth out what would otherwise be a volatile equity curve. Owning a diversified basket of trades — each with its own directional bias — can minimize the amount of day-to-day fluctuation you experience in your account value.
And, if you’re a good stock picker and possessor of sound management skills, you may even profit on your long and short trades in the same market.
Here are three low-risk short trades to consider for options trading.
3 Low-Risk Short Trades for Bears: Alibaba (BABA)
All the tariff talk hasn’t been kind to Chinese stocks like Alibaba (NYSE:BABA). Since peaking in mid-June, the internet juggernaut has slid 24%. Support zones aplenty have been broken in the process and BABA is now submerged beneath all major moving averages. Perhaps the worst development was the breaking of monster support at $167.
Spectators aren’t looking upon the breakdown kindly. Last week, BABA stock’s rally stopped dead once it ran into this old floor. It’s now a ceiling. As long as BABA stock sits below this level, bears maintain the upper hand.
To capitalize on the high implied volatility, sell the Oct $175/$180 bear call spread for 7 cents.
3 Low-Risk Short Trades for Bears: Wynn Resorts (WYNN)
Casino stocks have had a terrible four-month run. Almost every heavy hitter in the space boasts a bearish chart but it’s Wynn Resorts (NASDAQ:WYNN) that’s catching our eye today. It’s been a short-selling dream due to the consistency of its downtrend. The pattern of lower lows and lower highs has been easy to spot and trade over the entire descent.
Last week’s pop has carried WYNN stock to another attractive entry point. With potential resistance looming overhead in the form of old support and a descending 20-day moving average, this is a logical spot for short sellers to jump in.
Traders with an eye toward options trading might consider buying the Oct $135/$130 bear put spread for $2.28.
3 Low-Risk Short Trades for Bears: Whirlpool (WHR)
Whirlpool (NYSE:WHR) shares are getting sucked down the drain. Ever since peaking in 2015, WHR has been a mess. Now around $124, it’s more than 43% off its highs. We’re talking about serial underperformance here. Its downtrend accelerated with the mid-July earnings release which resulted in a painful two-day plunge. Since then a few feeble rebound attempts have materialized but each was rebuffed with prejudice.
Support at $122 has now been tested four times. With each probe, buyers’ resolve weakens and I suspect it’s simply a matter of time before short selling wins the day.
Wait for a break of $122, then pile-on with bear trades. Consider buying the Oct $125/$120 put spread.
As of this writing, Tyler Craig held bearish BABA options positions. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
