Put options Vs Short ETFs

Put options and short ETFs are two ways you can look at profiting from the downside, so which one is better.   What provides the least risk and highest reward?

Well at least when you compare it to your total investment put options probably give you a higher risk then short ETFs do.   But all and all I believe buying puts is a better way to go about trading the downside then buying short ETFs for these reasons.

1.       Higher reward

Obviously option trading will give you a much higher percentage gain then buying or selling ETFs.  If the market has a really bad day and moves down 5%, well the inverse ETF might be up 4 or 5%, but a put option could potentially be up 100% or more. 

That means that if you want to get the highest return for your investment put options will probably be the best solution.

2.       Lower Capital

You could buy the short ETF for $50 or you could buy a put option for $5.  It requires a lot less capital and therefore it allows you to have a smaller possible loss.  If you own the short ETF and the market gaps to the upside it can be potentially deadly to your account.  But if you bought the put the most you can possibly lose is the $5 you put into it.

3.       Look for individual stocks

Inverse ETFs allow you to take advantage of individual ETFs or individual funds.  However Put options are available on almost every stock.   If the market is going to have a down day you can profit from the market moving down as a whole or you can profit as a few weak stocks move down faster than the market.

I like the second option because you can make a higher return by profiting on a few bad stocks that can fall much faster than any ETF fund.

For more on put options visit http://www.stocks-simplified.com/put_option.html