ALL TRADERS READ THIS PLEASE
This is important. Today I got a call from a buddy of mine. I talk to him about twice a week. He's a position trader with a big account. He's really good at what he does, which is shorting. He's a professional, and he trades a professional account. Today, he decided to short a deal called AVCO. It was 2 bucks this morning at 9:30, and it ran to 10. Then it backed off to about 8 and ran up to 10, and backed off, and then ran to around 11. He shorted a whole bunch of it, but he wouldn't tell me how much. His usual positions in such a deal are around 4 or 5 thousand shares.
The stock then took off this afternoon before the close. I was watching it when Joe Kernan mentioned it on CNBC, it was around 13 bucks. It went straight to 32. My budddy had to cover at the market close at 34. I hung around to see what DELL's numbers were, and I noticed after the close that the only offer out was
50 bucks.
That's right, somebody was being forced to cover a short at 50 bucks.
Let's look at my buddy's trade. I'll give him the benefit of the doubt (because he didn't tell me precisely) and say he was short 4000 shares at about 15, his habit is to short more shares when it goes the wrong way (not a good habit in this case). He covered at 34.
He lost $76,000.00 Maybe more, since it was a cheap stock. Maybe a hundred grand. On one trade. Maybe somebody like him had to cover at 50 after the market closed.
Get the picture. A trade you could do with 8 grand in equity in your account. Short 500 shares at 15, cover for 50, you could lose $17,500.00 on 500 shares of a 15 dollar stock; a loss of ten grand more than you had in the account yesterday.
Fortunately for him, he had the money. Emphasise "had". If he didn't, the firm where he was trading would be forced to pay the balance.
What's the point? I posted some trading rules about a week ago. Number one was getting out of a bad trade. Never take more than a point against you, and NEVER NEVER NEVER average up or down on a losing position.
Remember you read this, because the time will come when you are looking at the screen and the stock is going the wrong direction. Your first thought is "It will come back." Then, it goes real bad, and you will think, "I'm screwed, I have to wait for it to come back".
Most of the time, it will, if you wait.
But it only takes one time to go the wrong way, real bad, past the point where you thought you couldn't cover. Then it gets into the Twilight Zone, and you are really really really screwed.
Only one time.
You're out of business.
Please remember this. It is the number one rule. Don't sit and watch it bankrupt you. Don't let a trade go against you. Take the loss and live to fight another day.
(Me? I was afraid to jump on it at 14 when Joe Kernan mentioned it.) |
