Puts Versus Shorts

I have been a regular reader of Andrew Tobias‘ blog for quite some time (before you would even call it a blog). I was first introduced to him when I read his book, The Only Investment Guide You’ll Ever Need. I found that book to be a very useful primer on all the different types of investment accounts that are available.

I haven’t been reading his site as often lately, since he has been focusing on political issues and speculative stocks. I’m not sure why he has been making it a habit of discussing his speculative stock picks lately. It really does his readers a disservice. Andrew does make it a point to indicate how dangerous his latest stock picks are, but I have a funny feeling many of his readers dismiss his warnings. I must admit it can make for some interesting reading, especially the details regarding Borealis. It’s kind of like watching a train wreck.

Back to the point of this post, I did find Andrew’s article this week on shorting stocks versus buying puts to be very informative. I must admit I haven’t done either of these activities yet. However, I’m interested in learning more about it.

I didn’t realize you could buy puts in a retirement account. I also didn’t realize that short sales can never qualify for long-term tax rates, which are generally lower. Andrew also notes several other tax differences between short selling and buying puts. From what I gathered, it appears that buying puts can often be less risky since your losses are capped, but there are situations where short selling has its advantages.

I’m not aware of Warren Buffett shorting stocks during his career, but I am aware of several other successful value investors that combine long-term holdings with selective short selling. When I spoke with Bill Mann several weeks back, he indicated that he combines long-term value investing with some selective short selling (in addition to dabbling in special situations).

What are your experiences with short selling and buying puts? Do you have any rules or criteria for selecting stock to bet against? Do you recommend any books or articles that discuss strategies for shorting stocks based on value oriented criteria? I’d like to hear from you.

3 thoughts on “Puts Versus Shorts

  • September 2, 2005 at 11:44 am

    Introduced! On BlogIntroduction.com

  • September 3, 2005 at 11:12 am

    I posted this on the TMF boards and got this reply:

    just for anyone reading that note…

    A third potential advantage is that, if you buy very long-term puts – expiring in more than a year – and you do hold them more than a year and win, your profit will be lightly taxed as a long-term capital gain. That is never true of a short sale, even if you wait 20 years before taking your profit. (Long-term puts, called LEAPS, are not available for NTMD.)

    hard to believe that comes from A Tobias, it’s dead wrong. You can hold a put til the second coming and you’ll still have a short term gain

    a call, on the other hand, is taxed via long term gains if the call is held for over a year….

    from our friends at the IRS….

    Put option as short sale.
    Buying a put option is generally treated as a short sale, and the exercise, sale, or expiration of the put is a closing of the short sale.


  • September 3, 2005 at 12:22 pm

    After reading the IRS Publication 550 I think I agree with you Mike. It appears that puts will only qualify for long-term tax rates when you own the underlying stock for over a year, not the put. It’s very unlikely that I’ll be owning a stock I want to short. I guess buying puts can only result in long-term tax treatment when you use them as insurance for a stock position you already own.

    Thank you very much for posting and helping to keep the information on this site accurate. Andrew Tobias really needs a comment system on his site to prevent bad information from getting out.

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