Let's start but clarifying this not investment advice and in my more than 21 years of being involved in the market very seldom have I ever held a position over night or for that matter a short more than hours. This is a post in response to several who asked me about protecting a short going into a catalyst. To join the knowledge pool enter here
When ever I heard a short squeeze is coming by traders who
have no clue how to short I shudder. You see this all the time on free message
boards, chatrooms and the worst place for this stocktwits. Really is everything going to
be a short squeeze because you happened to have bought a few hundred shares in
a company and over stretched your leverage? This is akin to the shorts crying
offering is coming when the company is cash rich. Let’s be real for a minute let’s sit down and
actually look at an example of why those touting short squeeze all the time
with no background in shorting are for lack of a better word, clowns. The stock
market is a casino not a circus you are always hedging your bet on your trade
to be the house or you are just the degenerate gambler. That being said if you
want to think this is a circus then let me be your ring master.
A very basic (still going to be over most heads) idea of
what a covered short is not to be confused with covering your short aka closing
out. This will assume you know about rolling options and trading for a credit. For this example, we will use $MU which reported earning yesterday and where I saw someone say shoirts will be squeezed. $MU is
considered one of the most liquid stock tickers with over 1 billion shares and
an average of nearly 73 million traded daily on average.
Now had you been living under a rock with no idea what GPU
cryptocurrency mining has done to the world in the last year nor knew $MU made
what is considered arguably the second best memory for GPU miners in the
silicon lottery you may have decided to short this. That would be gambling to
do so before the move and as such could go 1 of 2 ways slightly good or very
bad. So here is what an experienced trader would have done to hedge his bets in
his favour and protect his trade.
Image 1
Step 1 you must ascertain how big is the float
Step 1 you must ascertain how big is the float
Step 2 you need to know the trading volume on average and on
the day
Step 3 find out how much of the float is actually short
Step 4 find the cost of protection (this is where most will
happen to fail)
Once you have that you then look to see the technical entry
on your fundamental short. This is the traders advantage on $MU you would not
have entered the ticker until it priced a new 1 minute back to back 52 week
high this usually gives you a sweet pull back on any trade but more so on a
stock going into an earnings report because you will have shorts who failed to
do step 4 covering and running. That is it that would end the short squeeze
after that you now have the sharks and the wolves entering.
Image 2
At ASCEND TRADING everyone knows the rule I have for whole
dollar breakouts and as it is a secret sauce I will not share that here but if
you entered at the break of the previous 52 weeks high
say $61.05 you would be in the trade now short.
The trade worked in your favour and it bleed out all day
long fast forward to the end of the day power hour you would look to either
close the short as I like to do and did with $I or protect it.
Protection is done knowing you are now $2 ahead on the trade
in the last 15mins of the day the expected move for $MU from Earning is to be
6.8% either way and most times it has only moved 50% of the expected move and
if it did move outside it was by less than 1%.
Image 3
This is where the magic happens and as your ring master I am
going to mesmerize you.
At the power hour price of $59.02 the expected move of 6.8%
would put you in the range $4, $4.01336 to be exact. 50% of that puts you back
to the risk of $2 from this point or break even on the trade. To protect you $2
profit and hold for the possibility of much more gains you would now sell the
$58.50 weekly put naked for $1.79 mid price shown in RED Graph 3 (this would
give you another $0.50 of profit plus the credit of $1.79 per contract) and
doing so you would buy the $60.50 weekly call for $1.32 mid price (locks in
that you will not lose on the trade with at least $0.50 profit) shown in GREEN
graph 3 for a net credit of $0.47.
This is similar to a protective collar when you are long the
stock for those have been doing this in IRA, TFSA or RRSP accounts on dividend
paying stocks.
So recap to this point you are up $2.00 on your short you
have now protected your short for possible gain of $0.50 more and were paid
$0.47 to do so total would be $2.97 profit risk is stopped at a profit of $0.50
plus you were paid $0.47 to do so total of $0.97 profit. Now you see why on a
billion share stock doing this is going to be quite favourable as you covering
the spread. This is a special trade that sets up when a binary event like an ER
is reporting in the middle of the week could be a case for $GIS coming up if you
get that gap up.
When I trade my goal is simple to make more money than the bank pays me interest and when I short my results are life time better than 90% because I don’t take unnecessary risks or over exposure, I hedge. You want to learn to trade with a lower risk on exposure join the link http://www.ascendtrading.net?aff=osirustwits #TradeSocially
When I trade my goal is simple to make more money than the bank pays me interest and when I short my results are life time better than 90% because I don’t take unnecessary risks or over exposure, I hedge. You want to learn to trade with a lower risk on exposure join the link http://www.ascendtrading.net?aff=osirustwits #TradeSocially
