I think it is impossible to recommend anything on the short side without a whole disclaimer and operating manual included. It depends on so many things. First of all on the offsetting long positions, then on the total assets one has, and of course the risk tolerance. Also, any stop can depend on time and cicumstances as well as price, and I am not a good trader capable of using stops. Put options more or less provide an automatic stop, since if you are wrong, you basically lose whatever you put down.
…So I don’t think there is any answer fitting all.
I can only tell you what I am doing and what I think of doing, but don’t blame me if it doesn’t work for you. I myself have a huge tolerance for risk, because I believe in it, and if I am wrong I am willing to pay the price. I have been too often right in the past. But I don’t know anybody else who would short that much except maybe Bill Fleckenstein.
Most of my shorts are QQQQ, CLM, and homebuilders, and lenders, pretty much those dicussed here. I am probably the same amount long in precious metals.
Just to think out loud, these are the things going through my head:
For the short-term top, one could risk an Oct QQQQ put, and if it works use the gains to extend it later. You wouldn’t have to worry about a stop, since your money is gone automatically if you are wrong. I have never bought front month, but I am thinking of Oct 2006 $40 puts for $0.30 if I can get them tomorrow.
For the longer term, a QQQQ Jan 2008 put looks like a steal (Strike prices $40-$45). If the Nasdaq isn’t lower by 2008, it might not gonna happen, but if it does drop now, it might take two years before everything is over.
There are more experienced people for stop losses, but what’s wrong with 2300 on the Nasdaq, $37 for LEND, $420 for GOOG, $62 for MBI. Those would be the stop-losses I would think of. Anybody any suggestions?
Other than that I would just buy in-the-money puts on the housing complex (mid 2007), and just swallow the loss if it doesn’t work out.
Again, this is what I do with my money only. For my friends and family I use the same long-only positions as those of my investment club. (user: guest, password: guest, to see all positions)
