It’s not very pleasant I know, but it’s the markets. When a company is in trouble the vultures begin to circle.
I don’t mean vultures, I mean hedgers, risk protectors, opportunists, trend hunters or just plain old traders.
Before I get into this I am not suggesting Deutsche Bank’s share price is a one-way bet down. I’m just highlighting ways to short the stock and bet on it going down if DB continues to underperform.
But first here are three major risks of shorting Deutsche Bank stock.
First, if you are short your max profit is if the share price goes to zero. Your max loss is in theory unlimited. So if for example the company is bid for, then you can expect a significant rise in price and resulting loss.
Secondly, you can be forced to close your position off by your broker and the exchange. If your broker has borrowed stock from someone else to hedge your short position they can be forced to give it back. So, if your broker is not prepared to have your short position unhedged they will close off it whether you like it or not. And even worse, this can be done at any price that is fillable. Which is a nightmare if a stock is illiquid.
And thirdly, if the stock is suspended, which can happen when companies hit hard times – you could be asked to cough up 100% margin with no idea where the stock will come back to the market.
This isn’t an exhaustive list of the risks in shorting Deutsche Bank stock, so make sure you do your homework first.
But if you do want to bet on Deutsche Bank stock going all the way down to China Town, here are three ways to do it with some pros and cons.
Short Deutsche Bank stock on a spread bet with IG
With a spread betting broker profits are tax-free as you bet a certain amount per point a share price moves. So for example, if you bet £10 a point (cent) that Deutsche Bank stock moves then you could potentially make £7,720 if it goes to zero. You’d have to cough up about £1,500 in initial margin and make sure you have enough money on your account for daily P&L margin.
Even though Deutsche Bank trade in Euros you can have a GBP position.
- Pro – tax-free profits
- Con – unlimited potential losses
Sell Deutsche Bank stock as a CFD with Plus 500
Basically the same as a spread bet but instead of betting a £ per point you buy and sell a share equivalent as a CFD instead of owning the shares. Be mindful that your P&L will be in Euros though.
- Pro – trade on leverage with margin
- Con – trading on margin can significantly increase your losses and wipe out your entire account quickly
Here’s the Deutsche Bank CFD price from Plus 500
Buy a Deutsche Bank put option with Saxo Capital Markets
Buying a put option will give you the right to sell a certain amount of stock in Deutsche Bank at set price.
So taking an example from the below options chain on Deutsche Bank shares on SaxoTraderGo. If you buy some 7.6 January 2019 put options you will have the right to sell your Deutsche Bank at 7.6 even if the price is trading on the market at 6. Of course, you don’t have to wait till the option expires, you can sell your option position. If the price has moved lower the intrinsic value of the option will have increased from 0.41. However, the closer the option gets to expiry the lower the time value will get.
You can read more about calculating the time value of an option here.
The risk with options is that you lose the premium that you paid and the option expires out of the money worthless.
- Pro – limited risk
- Con – can expire worthless
Please note that whilst writing this article I have decided to buy a couple of hundred quids worth of put options. I went for a slightly longer expiry and bought the June19 7.6 puts. I cannot stress more strongly that this is not a recommendation to trade. I am a hopeless trader. But today feels like a gambling day. Maybe because I’m off to the races later with Spreadex at Sandown.
Position ticket below for your amusement…
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.