This article looks at the predicament of a short seller at this moment: what to do when the stock market is rising. Illustration with CFDs.
Short sellers how will you protect yourself in rising market?
So there was no rate hike from the FOMC last night and now the stock market appears to be recovering. It was great to see the market bottom but now short positions are losing money. What to do?
Look Ma stock prices are rising! Why are you looking so sad? | Picture: IG’s CFD trading platform
Choice #1 – Close some/all sell positions
This choice is not easy to make because of uncertainty. What if the market weakens again? What if those shorts can stay soft? How to know which short will stay soft?
There are two strong reasons to cover all positions:
- You completely remove your short exposure so that you are not at risk from a sustained recovery/rally.
- If you are the sort who is always torn between choices, exiting the market totally lets you clear your mind.
Choice #2 – Go long concurrently
This is part of buy-strong-sell-weak strategy. Go long on some while retaining your shorts. Because you have faith in your selection of short positions, you are convinced they will stay soft. You are equally convinced that you can pick a list of strong movers that will be resilient even if the broad market weakens suddenly. With some luck you might even make money from both legs.
How to do this:
- Just as you make a sell list from loss leaders, you pick buys from gain leaders.
- You can also go long through SiMSCI futures (represented by ‘Singapore Blue Chip Cash’ in IG’s platform) or through the SPDR Singapore Straits Times ETF. These choices takes away stock picking; you believe that indices will go to important chart levels one way or another.
– for short, + for long
Picture above shows a hypothetical trade setup. In this setup, there was a short sell position which is now losing money because the stock market is rising. To protect the account in such a contingency, long trades were placed on SiMSCI and STI ETF concurrently. Gains from both long positions soften loss from the short. With some planning, a trader can work out a basket that should be better balanced to have a neutral outcome.
Note: A trader does not need to use a CFD account to go long on the SiMSCI or STI ETF. Long trades for these two can be placed through exchange traded products using a cash account.
Comprehensive trading toolbox with CFDs
Contracts For Differences or CFDs are MAS-regulated trading products in Singapore. They were developed in the 90s and brought to Singapore a decade ago. Early pioneers of CFDs in Singapore included IG, CityIndex and CMC Markets.
We presented the use of CFDs to participate in a falling market previously using CFDs. That material can be read here. By selling stock CFDs, one can make money on a down move or protect a falling stock portfolio in a cash account.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."