Sirius I am reading this and not understaning why you think shorting those stocks by hedging is manipulation. Option action is a great way to see where bets are placed on where a stock is going to go but it only gives you part of the story. Calls/puts can be used as hedge against a long/short. For instance, in your example on the lenders with sub-prime exposure, if you had the foresight to see the impending shake up and over extention of those banks. I think kudos to them for being able to make money of those banks which over extended themselves.
1. You could of either shorted the equity (which is legal), but leaves you naked to the upside, with unlimited risk.
2. Buy puts, which caps your reward but the only money you risk is the price you pay for them.
3. Sell the calls, again unlimited risk to the upside and the reward is only the premium you recieve.
None of this illegal, its just a way of trading both sides of the equities markets.
I always maintain a mix of longs and shorts in my own small portfolio. It just makes more sense to me to not bet on just one side of the market. I tilt my portfolio to the side I personally believe the general market will trend in the near term. For instance, going into this week I was 60% long, 40% short, no cash. After this week, I sold the into that big up move we had earlier and now am tilted to the downside for a short term pullback. So I am currently 60% short 20% long and 20% cash.
Not saying what I do is right or wrong, its just enables me to make money (hopefully!) in both directions. Its a mini-hedge fund. We as retail investors may not have the same information flow but we are able to trade up/down/sideways markets unlike mutual funds.
