Things continue to look bleak for the US retail sector: consumer spending is decreasing while people are saving more of their incomes. And consumer spending is not expected to pick up any time soon what with a rise in long-term interest rates, skyrocketing unemployment and continued foreclosure activity. But surprisingly, despite the fact that fundamentals could not look worse for the retail sector, the prices of retail stocks continue to rally. Thus, it is a good time to start short-selling retail stocks. When an investor short-sells, he is betting that the price of a particular stock will go down. Short selling works like this: an investor borrows shares of stock from a broker which he sells at the current market price. When the stock’s price goes down, he buys back the shares and returns them to the broker, pocketing the difference.
There are three ways you can profit by short-selling retail stocks – the first is to establish a short position as described above. But an investor can also establish a short position by taking out a put option on a retail stock. A put option gives the holder the right but not the obligation to sell a certain amount of stock at a specified price and on or before a given time. Thus, if you hold a put option on a stock that gives you the right to sell it for $15 and its market price falls to $10, you can buy shares on the open market then exercise your option and sell the shares to the contract’s writer. Finally, you can short-sell exchange traded funds (ETFs) in the same way as regular shares of stock, by borrowing them from a broker, selling them then buying them back and returning them when the price falls. But shorting ETFs can be difficult and it is probably only for more skilled traders although it is made easier by the use of stock timing software.