Why not just buy puts instead of selling short?
To avoid Melvin-style meltdown, why don't more hedge funds go bearish by buying puts, instead of selling short? Seems like you can limit your losses better this way. I guess by selling short, you afford yourself more time to be right?
It seems obvious. But...
1) You have to pick a strike and time horizon. Nailing down timing and price is very hard.
2) Getting on size is difficult because desks assume information asymmetry. Moreover, if a bank is willing to sell 50k contracts of a 25 delta put, how do they hedge it? They have to short 1.25mm shares. Which puts pressure on the stock, which gets factored into pricing.
3) Liquidity in the options is going to be worse than stock. If you did end up trading that 50k with someone, there aren’t many places who can take them off for you. First call is always the same guy who sold ‘em and the market you get may stink. And impossible to do through the box / disguise it.
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