Gaining Exposure 	 	•	 203
overvalued and it drops before the shorter option expires, you must pay the 
entire bid-ask spread and the broker and exchange fees again when you roll 
your put option.
The moral of the story is that when selecting tenors for puts, you need 
to balance the existence of upward market drift (which lends weight to the 
argument for choosing shorter tenors) with bid-ask spreads and other fees 
(which lends weight to the argument for longer tenors). If you can iden-
tify a catalyst, you can plan the tenor of the option investment based on 
the expected catalyst. However, it’s unfortunate but mysteriously true that 
bearish catalysts have a tendency to be ignored by the market’s “happy ma-
chine” until the instant when suddenly they are not and the shares collapse. 
The key for a short seller is to be in the game when the market realizes the 
stock’s overvaluation.
Strike Price Selection
When it comes to strike prices, short sellers find themselves fighting drift  
in much the same way as they did when selecting tenors. A short seller with 
a position in stocks can be successful if the shares he or she is short go up 
less than other stocks in the market. The short exposure acts as a hedge to 
the portfolio as a whole, and if it loses less money than the rest of the port-
folio gains, it can be thought of as a successful investment.
However, the definition for success is different for buyers of a put 
option, who must not only see their bearish bets not go up by much but 
rather must see their bearish bets fall if they are to enjoy a profit. If the 
investor wanting bearish exposure decides to gain it by buying OTM puts, 
he or she must—as we learned in the section about leverage—accept a 
realized loss as soon as the put is purchased. If, on the other hand, the 
investor wants to minimize the realized loss accepted up front, he or she 
must accept that he or she is in a levered bearish position so that every 
1 percent move to the upside for the stock generates a loss larger than 1 
percent for the position.
There is another bearish strategy that you can use by accepting 
exposure that I will discuss in the next section, but for investors who are 
gaining bearish exposure, there is no way to work around the dilemma of 
the option-based short seller just mentioned.