What is short-selling and options in terms of the Stock Market?

Question

Additional Details: Are there certain techniques used when indulged in these two categories?

Answer 1

Short-selling means that you sell now and buy it back later.

Say a stock is at $70 and you think it will drop to $50. You sell it now (you have negative shares), and then you buy it back at the lower price and get the difference in between.

Options are written contracts that allow you to buy or sell a share at a specific price in the future

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Answer 2

short-selling is when you sell shares you don't own in order to make a profit from a fall in the value of the shares.

When you make a short sale, the process is a bit more complex as your broker has to acquire shares from the DTC to sell into the market for you, but in essence, you borrow them, win or lose from the price change, than hand the shares back when you're done.

options contracts enable you to buy or sell a stock up until a future date (depending on their type).

For example; the most common options traded may be called in at any time up until they expire; the amount you pay for the contract depends on what the price of the stock itself is, and what the strike price of the contract is against the expiry time (see Black-Scholes options model)

for example; an options contract for 1000 shares of a $20 stock with a strike price of $60 and an expiry of one month will cost you next to nothing. (the chance of a $20 stock tripling within 1 month is next to nothing, hence so is the price of the option)

The reason for this is that the contract is totally worthless till the stock goes to $60 or more, hence this is called an "out of the money" option.

As a result, you can trade options against a stock since the price of the option increases or decreases as the strike price gets closer/deeper in the money or farther/deeper out of the money.

you can also use them as a hedge; if I have 1000 shares of a stock at $20 and I'm worried something bad might happen to the company, I can buy a put option with a strike price of $18 to expire in say... 3 months; this means, if the stock falls to say, $10, it doesn't matter because I can exercise the option and sell my 1000 shares on the options contract that promised me $18 for them.

similarly, if I thought I'd like to make a bit of cash on the shares I'm holding, I could sell a call wth a strike of say, $26 to expire in a few months... but, if the stock does rise above my strike and I get called in on it then I have to hand over my shares for that price (and hence miss out on a bigger profit).

Naturally this gives way to many complex options positions you can create for yourself... butterflies, collars, etc.

in essence:

1) Call or Put = option to buy or option to sell

2) strike price - price the call must be at or above or price the put must be at or below to be worth anything

3) expiry - the month it expires

Look into the "greeks" - the delta and other information that gets priced in to cover volatility factors etc.