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As far as I know, if I want to sell short, say, $100 worth of stock I need to post $150 in cash collateral and pay some fees each day. Another way is to buy a put option. In that case, I need to pay the bid-ask spread, and the option is losing time value as I hold it. Which is cheaper?

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  • "[…] and the option is losing time value as I hold it." – The notion that time decay (theta) means that options tend to lose value over time is a common misconception. Option price models usually assume that the current price of the option is a fair price, meaning that the amount of money you can expect to lose thanks to theta equals the amount of money you can expect to gain thanks to gamma. – Tanner Swett Feb 8 at 22:34
  • Why gamma and not delta? – James Feb 10 at 0:11
  • I believe option pricing models also usually assume that the stock is equally likely to go either way (or, to be precise, that the expected value of its return is approximately zero), so delta is treated as neither an expected gain nor an expected loss. – Tanner Swett Feb 10 at 2:23
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Traditional margin is 150% of the short proceeds (brokers can require more) but the proceeds are used against the 150% so effectively, the margin requirement is 50% (cash or marginable securities).

A drawback to shorting stock is the borrow rate. Each day it's the closing price of the stock times the borrow rate times the number of shares short. If it's a high borrow rate, this fee can exceed the cost of the put in no time at all.

And then there's the inherent higher risk of a short position compared to buying a put but that's a different story.

The cheapest way to take a short position is to sell a naked call and use the proceeds to buy a put at the same strike. It can be done for little to no cost and is called a synthetic short.

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  • Thanks for replying. Are synthetic shorts available at any broker for an individual account? I'm with Merrill Lynch and it looks like they only allow one to sell covered calls, i.e. one has to buy the full amount of underlying first. – James Feb 8 at 2:16
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    There are 4 or 5 levels of option approval depending on the broker. Merrill Lynch has 5 levels, as noted in their Option Account Application. Selling a naked call is the highest level. Apart from an account size minimum, brokers want to see that you can manage lower levels before they'll approve you all for all of them. Avoid options, especially naked ones until you have studied them extensively and you have years of experience in the market. They'll take your money quickly if you don't – Bob Baerker Feb 8 at 2:30
  • But can they really approve of someone's selling a call without collateral? It's too good to be true. – James Feb 8 at 11:49
  • @James - No, they do not approve selling a short call to open without collateral. You must either own the underlying, provide sufficient margin (about 20% unless your broker requires more), or it must be protected to some degree by a long call (various spreads). – Bob Baerker Feb 8 at 14:07
  • Keep in mind that a the quoted price for options is not what you pay. Options are sold in lots of 100. If you see an option priced at $9, the minimum purchase is $900 plus commission. tickertape.tdameritrade.com/trading/… – Orange Coast- reinstate Monica Feb 8 at 22:08

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