Suppose that I want to make a small investment of around 1000€ and that I want to short the German car industry and its suppliers over the long term (5-15 years). How would you do this?
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2 Answers
Very simple: Buy Put Options, and sit on them.
If they go down, you make money - the difference between the exchange price and the price the Put is for.
If they don’t go down, your options are worthless, and your money is gone.
After some month, you will need to replace your puts with newer ones, as they have limited run times.
Example (simplified, and with made-up data):
Audi trades currently for 100, you think it will go down. You buy an Audi Put option with a strike price of 90. This option allows you to sell Audi shares for 90 (which currently would be a dumb idea, as they are worth 100); it will cost only a small amount, say 2 for a count of 100.
A. After six month, Audi is still above 90. Your options run out and are worthless.
B. After six months, Audi trades at 80 (so you were right with your prediction). You execute your options, and sell 100 Audi shares for 90 (buying them for 80 on the market at the same moment), this gains you (90-80)*100 = 1000 cash. Remember, you paid 2.
Scaling this up, for the whole 1000, you get 500 of those 100 packs, and you would make 500 * 1000 = 500 000. If your prediction is right. Or you lose your 1000, if your prediction is wrong.
Note that this is not for beginners, as most people don’t realize they probably lose everything if they guess wrong. Start with small amounts, or better, start with ‘simulating’ your actions in Excel to see what you would gain/lose.
There are a few ways to do it:
1. Shorting the Stock (naked)
One could short the stock, i.e. borrow the stock from your broker; sell the stock in the market; and promise your broker that you will buy it back either when you choose to, or when they ask you to.
This is risky. In one way, because the stock price could more than double (so you would end up owing more than the original amount). Also, if the company pays a dividend, you would be obliged to pay your broker the same amount. Also if the people your broker borrowed the stock from sell it, your broker may ask for it back (which is usually the worst possible time, resulting in a 'short squeeze').
2. Selling Puts
Put options give you the right to sell the stock (even if you don't have it) at a certain price. If the stock goes down, then the put options should go up in value. However, they have a certain amount of 'risk premium' included in the price, and that risk premium increases based on the length of time the option is valid. 5 to 15 years out is a very long time. I don't think there is much that is listed even 5 years out, and the market is unlikely to be very liquid, so the spreads would be wider.
3. Selling Covered Calls
You buy the stock, and then you give people the right to buy that stock from you at a certain price (by selling the call option in that stock on the market). While it may seem that you will benefit if the stock goes up, you won't, because you've sold that right to the market with the call option. You will still receive any dividends (unless someone exercises the option you sold them before the ex-dividend date). You still have to think about whether or not you would lose money from your stock position and if that is offset from the money you make from the options position. There are unlikely to be 15 year out options listed, so you would likely have to sell call options again after the ones you sold expired or re-open the position if you get 'assigned' (the holder of the option exercises theirs).
4. Shorting the Stock (with protection)
To reduce the risks of losing more of the money than you initially started with, you could also combine your short position with a call option to buy the stock back if it went up (e.g. 50%). That would be unlikely so the cost would be lower. You should consider all of the possible outcomes and what your risk tolerance for those outcomes (no matter how unlikely).
Individual Stocks vs. ETFS
You might also be able to do this with combination of positions on individual stocks. There may be Exchange Traded Funds on the sector, but they would need to be sufficiently liquid that they would have options listed or are shortable. ETFs also have higher fees, so that may not be so helpful to your long term objectives. Also the more exotic the ETF, the less liquid it is and the higher the fees. In the US, there is the XLI Industrial Sector Select Spider ETF which is sufficiently heavily traded that it has options listed on it, but this is just for 'Industrials' as a whole, and not oriented towards the auto industry let alone the German one.
Risks
Shorting and options are risky - you could potentially lose more money than you started with(!). Your (US) broker will not discuss specific options strategies until you have read and understood the OCC risk and disclosures document:
https://www.theocc.com/components/docs/riskstoc.pdf http://www.goldmansachs.com/disclaimer/salesandtrading/theooc-doc.pdf
