I live in the US and I work for a company that is heavily related to a particular commodity X. As such, when I began working for them, I signed a document stating that I would not purchase stock/ETFs/Mutual funds/etc... that were composed of or reliant on any futures for this commodity X. This is unfortunate, as I believe the price of said commodity is going to drop in the medium term, and I would like to short it. I obviously can't short my own company's stock. What mechanisms do I have at my disposal to short this commodity given my restrictions? Can I instead short the stock price of a company that isn't mine and is heavily involved in the generation of commodity X, for example? This appears to be the closest way to do so legally, but I want to make sure I am not missing some alternative mechanism?
Edit: Forgot to note this, but the decision/desire to short this commodity is based entirely on publicly available information and not dependent on some secret insider information. My understanding of how the commodity works in general comes from experience working at this company, but I don't have insider knowledge of some upcoming event or movement of the commodity that isn't public.

  • 1
    To close a short position, you have to buy the security, which violates your agreement with the company. Since your company is "heavily involved" in that commodity, if you have material non-public information about the company and use that as the basis for trading you may violating SEC insider trading laws too. Feb 17 '20 at 11:46
  • @NorgateData see the edit, its based on public information. I also understand that there's no way around buying a security. But my restriction is specifically on futures. A competitor's stock doesn't contain that commodity's futures and I have no specific restriction on purchasing their stock. I am just looking to ensure that I'm not missing a more direct methodology for shorting the commodity.
    – Runeaway3
    Feb 17 '20 at 13:03
  • To be clear, do you have insider information about this commodity? If you have the information, then it doesn't matter whether you're actually basing your decision on that information or not; the legal system can't see inside your head. Feb 17 '20 at 14:28
  • @TannerSwett thank you for clarifying that. No I do not. I am sure that other people in the company may have knowledge of the volumetric movement of the commodity or internal projections of its price, but that is information I do not have access to.
    – Runeaway3
    Feb 17 '20 at 14:32
  • A falling commodity price is beneficial to some companies, causing profits to rise, and thus increasing the share price. Will the falling commodity price cause your company to lose profits?
    – RonJohn
    Feb 17 '20 at 15:17

An alternative way to short a security is to create a Synthetic Short using its options, if they exist.

This strategy utilizes two option positions. A short call is sold and the proceeds are used to buy a long put, both with the same strike and expiration. This combination has a similar risk and reward to shorting the underlying with the difference being that the Synthetic Short has a time limitation (expiration).

There are several possible issues with this strategy:

  • If you have specific contractual language forbidding the shorting of this commodity and/or shorting your company's stock, it's likely that you may have similar prohibitions for synthetics

  • If the underlying moves up or down significantly, the short call may be assigned early if it's an American style option, resulting in a short position in the underlying

Therefore, your only alternative might be to short a similar stock that has no such prohibitions.

  • I can do some google searches to understand what a Synthetic short is, but can you explain to me what the difference is between this and simply going long on a put option? If my intention is to make money from a falling stock price, why would I choice synthetic shorts over long puts?
    – Runeaway3
    Feb 17 '20 at 14:34
  • @KingG0at - In your question, you asked about shorting the "stock price of a company that isn't mine". A synthetic short tends to cost nothing, often put on for a small credit and it duplicates a short position in the underlying. It is useful when the underlying security cannot be borrowed for shorting. Long puts and short the underlying have different costs and different risk/reward characteristics as well as different margin so while they're directionally similar to the downside, they're not the same. Feb 17 '20 at 15:25
  • Note that since most (if not all) commodity options are actually options on futures it may still violate the restrictions that have been placed on you.
    – D Stanley
    Feb 18 '20 at 18:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.