If you want a spirited discussion of options, talk to Mark Wolfinger, a Chicago trader who has been in the options business since 1977. His latest book is The Rookie’s Guide to Options.

I think he has an interesting point of view about the ban on short-selling 799 financial stocks. That list has now been expanded to include some other Dow Jones Industrial Average Stocks, GM, GE and American Express.

So I'm going to let Mark be my guest blogger. Here's his post:

Last week was the most volatile week in stock market history. But the Royal Mounties (the Feds) have come to the rescue! Or have they? The curb on short sales gave the market a boost, but: what happens in two weeks when the ban expires?

Reminder: Short selling involves selling shares you borrow from your broker. Short sellers hope to buy stock later – at a lower price - and earn a profit. It’s a common investment technique.

Many cheered when the government banned short selling of 799 financial stocks. Supporters believe short sellers were responsible for unfairly driving stock prices lower. Apparently they believe it’s wrong to profit from the unfortunate circumstances of others? That’s evil. That’s un-American.

President Bush commented that short sellers were “intentionally driving down particular stocks for their own personal gain.” What’s wrong with that? Don’t investors buy stocks at the slightest rumor, driving prices higher?

Unless short sellers spread untrue rumors (that’s not legal) they are doing nothing wrong. Markets go down, and blaming that on ‘evil short sellers’ is foolish.

Opponents believe too many companies took too much risk. When those risky investments turned sour, they lost money. Their stocks declined. Companies used too much leverage - they borrowed money to back risky investments, and when those investments collapsed, they were unable to borrow enough money to meet maintenance requirements (similar to your margin call when your portfolio value declines). As a result of losses, stock prices collapsed.

That’s the fault of the bank’s traders and upper management who allowed those investments – not short sellers. CEOs walks away with golden parachutes (how do they sleep at night?) leaving employees without jobs and shareholders with worthless stock.

Short sellers understood the situation before anyone else, and deserve their profits.

Consider this: When you research a company’s business and decide the future is bright and the price is reasonable, you buy shares. So I ask: what’s wrong with doing an analysis, deciding the future is bleak, and the shorting the stock? No one objects when investors buy shares.

Selling short deserves more respect. When investors want to buy shares, short sellers help supply those shares – keeping the price reasonable for buyers.

Will this new government policy help? In my opinion, no. It may have a short-term effect – as it did last Friday.

If investors cannot short stock, they can buy put options (giving them the right to sell stock at a fixed price) or sell call options (which profits when a stock declines), or both. In fact, selling one call option and buying one put option is equivalent to selling 100 shares of stock.

Thus, short sellers will not be stopped. This new policy is a futile, publicity-generating, gesture – hoping to stem the bearish tide. The deregulators now want massive regulation!

This policy may succeed - psychologically. If people are reassured, they may (over time) pour money into the market (or at least stop selling), preventing prices from falling. It’s too soon to know.