Crystal Ball Strategies: Not For The Fainthearted Some investors employ risky strategies in hopes of making a lot of money, quickly. These are short-selling, futures and options trading, and hedging. They generally involve crystal balls, margin accounts, and a whole lot of luck.				> Home > Glossary > Support
		In short, don't try them unless you have nerves (and a wallet) of steel .. and certainly don't try them with your retirement money.
		Short selling: Don't sell yourself short. Also known as shorting, the strategy works like this. Say you think a stock price is about to fall. You open a margin account with your broker (this enables you to borrow against your account). Then, against this account, you borrow shares in the "doomed" stock from the accounts of other investors and sell them, hoping to be able to buy them back at a much lower price. If the price does go down during the specified amount of time, bingo! If it rises, however, you lose.
		Futures: the Long and Short of it. If you buy a futures contract, you promise to buy or sell a set amount of something (a commodity, financial instrument, or stock index) at a fixed price on a certain date in the future. You need a faultless crystal ball for this strategy.
		Say you expect the price of pork bellies to rise. (Why pork bellies? We really liked the movie Trading Places.) You can take a long position in pork bellies, which means that you buy futures, expecting the price to rise by the time you have to sell them (you'll make a profit). Or, you can take a short position, which means you borrow futures and sell them, expecting the price to decline by the time you buy them back (again, you make a profit). However, if you are wrong, you stand to lose a lot.
		The attraction of futures is that you only have to put down a small percentage of the total amount of the contract's value in order to get started. But that is also the huge downside. The amount you can lose with futures is enormous. In a well-publicized case in the early 1990s, a single trader at a British bank, Baring's, lost so much money in futures trading that the bank actually went under. He was reportedly given a lot of leeway because he made a huge amount of money to begin with. Then the market turned. Easy come, easy go.
		Options: Calls and puts When you buy options, your potential loss is limited to the amount you actually invest. Buying options, if done correctly, can effectively reduce the risk of your portfolio.
		When you buy a call option, you buy the opportunity -- but not obligation -- to buy a stock, an index, or a futures contract at a set price (strike price) for a specific period (usually a few months). This is a bet that the price will rise during that period, and you'll be able to buy at the lower price and immediately sell at the higher price (and pocket the difference). If the price does not rise, and you don't want to exercise the option, you don't have to, and all you lose is your initial investment.
		If you buy a put option, you buy the right to sell a security or asset at a set price for a set length of time. In this case, you think the price will fall. If it does, you can still sell it at the higher price, and pocket the difference. If it doesn't, you can choose not to exercise your option, and lose your investment.
		There are costs associated with options -- commissions and premiums -- that can eat into any profit.
		With selling options, the potential for loss is much greater; therefore it is a strategy best left to the experts.
		Hedging Sophisticated investors sometimes hedge with options in order to protect their overall investment from a change in one security's price. This is actually a strategy for reducing risk, but to be successful you need to know what you're doing.
		Say you own 100 shares of Microsoft and expect the shares to rise in value. But you can't afford the loss if they happen to fall. To hedge against the possibility that they could fall, you would buy a put option on 100 shares (giving you the right to sell at a certain price for a set length of time). If Microsoft falls, you will recoup some losses through exercising your option. But if it rises, you don't exercise your option, and your profit (through the shares you own) is reduced by the cost of buying the option.

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