Buy put options on the underlying stock. This gives you the right, but not the obligation, to force a sale of stock at the strike price.
Say you have a hot Internet IPO which debuts at $10. People assume it will follow the Google trajectory and be worth hundreds within a few years. You can buy puts at $10 for a year from now -- this would entitle you to sell any shares you held at $10, regardless of what the price is. If a hypothetical counterparty believes that the price is going to increase, writing this option (promising to buy X shares from you at the price of $10 from you a year from now if you ask for it, in return for cash money today) is like printing free money: you'll probably let the option expire without acting on it, and otherwise they get the stock they want anyhow.
Now examine what happens if the stock tanks to, say, $2 over the year: your options entitled you to sell X shares at $10 apiece, regardless of the market price of the stock. You can thus buy the stock on the open market ($2 per share) and exercise the option (selling at $10 per share), netting $8 a share minus commissions minus the premium you paid for the option in the first place. (In actual practice, since you can SELL the put option and it has high "intrinsic value" near expiration in that scenario, you don't actually have to ever become an owner of the underlying stock.)
But what if the price balloons to $20? Clearly, you don't want to buy at $20 and then sell the same day at $10. That's the beauty of puts, though: you don't have to. You just walk away from your options, which expire worthless. You are never at risk, in this strategy, of losing more money than you spent on acquiring the puts in the first place. This contrasts favorably to the standard short sale, which has unlimited downside risk.
Incidentally, and this goes for all investing: know what you're doing before you take any advice from the Internet. For example, if you don't know whether I was talking about American or European options (and what the difference is), you should probably not touch options trading.
On considered reflection I'm 75% invested in index funds, after reading Bogle et al and figuring that no matter how smart you are its impossible to reliably beat the market. The other 25% is mentally accounted for as "World of Warcraft except with a higher monthly fee and the slim possibility of better loot". (I bought a nice chunk of BAC back in the fifties, among other brilliant ideas, and am very, very glad I mentally waved adieu to all money invested prior to actually waving adieu to it.)
Nope. Options don't become available for several weeks after an IPO. There needs to be some historical price data to feed the black-scholes formula in order to price the options.
A real trader would start trading anyway. Volatility? Just a number computed from a mound of stale data. Kurtosis? Sounds like a disease. Too much thinking for a game as simple as "buy" and "sell"!
Buy put options on the underlying stock. This gives you the right, but not the obligation, to force a sale of stock at the strike price.
Say you have a hot Internet IPO which debuts at $10. People assume it will follow the Google trajectory and be worth hundreds within a few years. You can buy puts at $10 for a year from now -- this would entitle you to sell any shares you held at $10, regardless of what the price is. If a hypothetical counterparty believes that the price is going to increase, writing this option (promising to buy X shares from you at the price of $10 from you a year from now if you ask for it, in return for cash money today) is like printing free money: you'll probably let the option expire without acting on it, and otherwise they get the stock they want anyhow.
Now examine what happens if the stock tanks to, say, $2 over the year: your options entitled you to sell X shares at $10 apiece, regardless of the market price of the stock. You can thus buy the stock on the open market ($2 per share) and exercise the option (selling at $10 per share), netting $8 a share minus commissions minus the premium you paid for the option in the first place. (In actual practice, since you can SELL the put option and it has high "intrinsic value" near expiration in that scenario, you don't actually have to ever become an owner of the underlying stock.)
But what if the price balloons to $20? Clearly, you don't want to buy at $20 and then sell the same day at $10. That's the beauty of puts, though: you don't have to. You just walk away from your options, which expire worthless. You are never at risk, in this strategy, of losing more money than you spent on acquiring the puts in the first place. This contrasts favorably to the standard short sale, which has unlimited downside risk.