Why I’ve decided to stop shorting the majority of low float stocks on day one.
In this current market, there’s opportunity everywhere, ignited by the most insane stock market volatility I’ve seen in a long time, with stocks like $LGVN going from $3 – $45 in a matter of days.
In bygone years, you couldn’t find shares to short, to take advantage of these extended runners. With a broker that specialises in short-selling, like, TradeZero, you’ll often find the locates you require.
This and last week, we’ve experienced a flurry of low float madness in the stock market, with a number of tickers running 100% plus in a single day.
This is brilliant for long traders, creating lucrative opportunities to effectively double their investment. But, it can be potentially catastrophic for day-one short traders, if they fail to cut their loss when wrong.
Low floats, by their nature, have limited share supply, so when demand ramps up, so can volatility, catapulting a stock to the upside.
This is why I’m no longer shorting day one, low floats in the majority of scenarios.
Because these stocks are high-risk, you absolutely CAN NOT be early (front-side of the move) when attempting to take a short trade.
If you freeze in your trade, say in the 3s, 5s, even 10s, you risk losing upwards of 200% plus.
To stay safe, see a few rules I’ve created for myself.
1. Never short a low float on its front-side.
I define a low float as $5 million or less in the float – to many though, $10 million or less is considered ‘low’.
This is how I would describe front-side. At no point are any longs ever really under water in this trade, from the beginning of the day. Shorts, however, from almost any position, are fighting the stock to get back to break even.
Some shorts try to be a hero, by ‘top ticking’ their short, finding the absolute top of the move before momentum shifts to the downside.
I say heroes die on their sword and I have enough stab wounds to prove it.
$ISPC was definitely more of a back-side short. When the $10 whole dollar level broke, it left most longs in the morning bagged, giving shorts a clear level to risk off: shorting the 9.70s risking around the 10 level.
You can see a direct comparison between the two charts where in one shorts are under water and in the other longs are.
2. Forget crowded, low float shorts
Last week $PPSI re-tested ‘low of day’ in the afternoon, giving back almost all of its morning move. Many shorts may have felt the stock was back-side, before it sprang from the $6s to the $12s in a matter of hours.
The stock traded 200 million plus in volume that day. When there’s high demand and limited supply it’s hard for a stock to die – effectively making it a poor short.
3. Look to go long the majority of high volume day one, low floats
As a short biased trader, this is definitely one exception where I’ll look to go long. If a stock has limited supply and high demand, theoretically, I have to consider it a long opportunity. Just because you usually short sell, that doesn’t mean you should short a stock with the above criteria.
To be clear, I believe in shorting low floats – just not on day one in the majority of scenarios.
Otherwise, stay safe and enjoy the volatility.
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