What Is Short Selling? Short Selling Vs Buying Put Option

What Is Short Selling? Short Selling Vs Buying Put Option

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What is Short Selling?

In short selling, the sequence of transactions is exactly the opposite ok first let’s understand a general transaction how does a general transaction takes take place first you buy why do you buy? thinking that the prices will go up let us say you buy a stock 100 rupees and you feel that the stock price is going to go up that’s why you wait until it goes up assume.

It goes up to 120 right then what will happen to tell me at Rs 120 you will sell it off. What is your profit? so your profit will be Rs 120 which is your selling price minus Rs 100 which is your cost price but chronologically what happened is first you bought at Rs 100 then you sold at Rs 120 this is normal buying.

What Is Short Selling? Short Selling Vs Buying Put Option

Let us say 150 rupees right now XYZ some stock is at 150 rupees right now and you feel that this stock will definitely come down to 120 is what you feel so are you bearish on this stock. So what can you do a normal person who doesn’t know short selling? the person he will wait and watch till the stock comes down to 120 and then he will enter at 120.

But if you’re a smart investor what will you do you will sell first at 150 and when the price goes down at 120 you will buy so what happened in this transaction? In this transaction you sold something which you did not have, you sold something which you did not have, and when the prices went down from 150 to 120.

That is when you bought it back okay for such a transaction you need to place an MIS order okay so always remember this whenever you are doing a short selling place an MIS order but what is this MIS order you want to check it out in the next section.

What is MIS Order In the Stock Market?

Let us understand what is MIS Order in the stock market. MIS means Margin Intraday Settlement (MIS) the word itself says it’s an intraday settlement, so what happens in an intraday settlement you’re going to buy and sell both on the same day.

What Is Short Selling? Short Selling Vs Buying Put Option

But again remember what is the key feature of short-selling sell high and then when it goes low then buy. So step number one is sell, step number two is buy but when it is going to be an intraday situation which is to be done during the market.

As only everyone knows that the market us are from 9:15 in the morning to 3:30 in the afternoon but please be aware that these MIS transactions are squared off by various brokers at their own time slots okay like there’ll be many brokers who will auto square it off at 3:10.

Understanding MIS with Example

We can understand what is MIS with an example, like in the previous case which was taken that at one hundred and fifty rupees you had sold a specific stock okay. Unfortunately, it didn’t come down but it was higher okay it goes 160 are you at a loss now of 10 rupees per share?

What Is Short Selling? Short Selling Vs Buying Put Option

And Still, the broker will not wait till then the broker will automatically square it off at 3:10 okay there are some brokers like Zerodha who give you that additional 10 minutes so brokers like Zerodha will squareoff of the transaction at 3:20 okay so that additional 10 minutes of hope you can have that may be the share price will come below 150. You may make a certain profit okay but then the whole question now I hope you have understood this as to what is MIS but still one question I’m sure remains in your mind that if I don’t have a share how am I able to sell it?

Difference Between Short Selling And Buying Put Options

FeatureShort SellingBuying Put Options
MechanismBorrowing shares from a broker and selling them on the open market, hoping to buy them back at a lower price laterBuying the right to sell a fixed number of an underlying asset at a predetermined price before a set date
Profit PotentialUnlimited if the stock price keeps fallingLimited to the strike price minus the premium paid
RiskUnlimited losses if the stock price risesMaximum loss is the premium paid for the option
CostsMargin requirements, interest on borrowed shares, and potential dividend paymentsOnly the premium paid for the option
FlexibilityCan be used for speculation or hedgingBetter for hedging downside risk in a portfolio
ExpirationNo expiration dateOptions have an expiration date
Margin RequirementsRequires a margin accountNo margin account needed