I was trading only stocks at the time, and I only had one strategy. Shorting pump and dumps. It was a high percentage strategy, winning percentage was over 90%. And the wins were not small, around 10-20% on average, over 1 to 2 days.
Winning percentage over 90%, aggressively using margin, and 10-20% average gains add up quickly. I didn’t know why more traders weren’t doing what I was doing. There were some, and most of them were making a good living off of it, but most of the traders out there were long, and short sellers were viewed negatively. Just looking at the Yahoo message boards at the time, you could tell. Most of these retail traders/investors were looking for the next big move higher, not lower.
It seems like shorting is just not natural for most traders, rooting for a stock to go down to make money. Its like betting on the don’t pass line in craps. Most craps bettors bet the pass line.
When I was trading back in my earlier years, I was reckless. If I was winning most of the time, why not make as much as possible and bet big? I had no money management, no risk controls. It was a balls to the wall type of trading, and it led to spectacular rises and even more spectacular crashes.
Going all in was not something that I did only for the best setups, I did it almost all the time. If only had I known back then how extreme volatility in the account is bad for long term returns, I wouldn’t have bet so big. And probably would have a lot more money now. I wrote about this several years ago. I didn’t even think about the Kelly criterion, about the probability of losing my bet. Or even the thought of having cash as providing optionality for averaging into a bet at a better opportunity if the move goes against me.
In February 2000, I shorted a multi day runner called Metrocall (MCLL), a paging company that was suddenly now a wireless internet play. Investors stretching their imagination to pump up a stock. It was common back then. It went from around $1 to over $5 in a few days and came up on my scans. I knew it was a dinosaur paging company that was eventually doomed so I started shorting the stock around $5.25, with plans to add more if went higher. It was a crazy time, moves got wild, so even the aggressive short seller I was didn’t go all in right away. The next day the stock gapped up and started trading in the 7s, and I decided to add more, going almost all in, giving myself some room to weather a spike towards 10 if it happened, but I expected this to be the final pump day and expected a dump coming very soon. It grinded higher into the close that day, closing near 10, putting me in a margin call. I was in the middle of the maelstrom, and all I knew was just to hang on and hope it didn’t go much higher.
The next day, I was in a full blown crisis situation. MCLL gapped up above $11, and I was all in. I knew it was eventually going to go way below my average short price, I just had to weather the storm. The short squeeze and momentum daytraders piling into the stock took the stock all the way to $13 in the morning, and now my account had a negative balance! I had blown up completely.
I was expecting a phone call or an email from my broker about the margin call and my negative account balance but they didn’t contact me. The stock went over $14, making my account balance even more negative, and I was getting bigger and bigger into debt to my broker. The volume and price action was frantic on MCLL, but it eventually settled down as the stock ran out of momentum and fell back down to close around $11. I breathed a huge sigh of relief as it looked like I dodged a huge bullet.
I was going to get another margin call, but at least I had 2 more trading days for the stock to go down so I could hold on to the position. I had no other money outside of that brokerage account so sending in funds was not an option.
Back in those days, most online brokers used primitive end of day risk management systems, and you actually had 3 full trading days to meet your margin call. You could push the boundaries of using margin and even hold on to positions despite losing a lot and becoming deeply under margined. They only liquidated you after the 3 days were up and you were still under a margin call.
Luckily, MCLL gapped down the next day under $10, and the selloff that I expected to play out 2 days before finally happened, and I covered about half at a more manageable loss and kept the rest and covered a few days later near break even.
If I had put on the same trade in 2020, I would have been liquidated on the way up near the peak and my account would have been in tatters. Or worse they discover it late after my account went negative equity and liquidated me. That actually happened a few years later, although that’s another story for another day.
That kind of all in trading eventually caught up with me and I did blow up a year later, and again and again after that. I still have to fight those outlier black swans every now and then, even though I don’t ever go all in on my capital on one trade anymore.
We are getting the big gap up off of the small down day on Friday, on no particular news, or is it Mutual Fund (now ETF?) Monday? I did cover my small short on Friday for a small gain, as I wasn’t super confident about the trade and took the gift of a dip to cover. No edge at these levels in SPX, just focusing on individual stocks where the action is these days.
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4 comments:
What do you think of XBI - seems like a bigger bubble than tech? Vol not super high so thinking of adding puts to hedge the rest of the portfolio. Do you think anything has changed fundamentally for these bio/pharma names to be 40-50% higher other than some extra profits from vaccines?
I don't see much of an edge just shorting a biotech ETF. You should think of it as a separate trade. Would you put on the position if you didn't hold anything else?
I believe we are in the middle of the mania phase of this bull market and that's a dangerous time to be short if you don't have great timing.
You are better off finding a biotech stock that is trending (see Stocktwits Trending section) like VERU and shorting that. I am not really a portfolio type of investor, I usually only hold a few positions at a time, and usually those are more actively traded daytrader stocks.
I looked at Veru but dont understand specifics on their new results / same as GLSI - dont have an edge over people who understand pharma. I do own a portfolio of several stocks that I like over the long run so the etf short / tech short is some sort of a hedge even if not super correlated. I traded a lot in 2006-2010, lost a bunch in 06-07 as was early but more than made up later.
Playing with stuff I can afford to lose. We should see some big capitulations in coming weeks in my view - of course could be wrong
People who understand biotech aren’t the ones driving VERU and GLSI higher. It is momentum traders, mostly retail, who see a stock going up a lot on huge volume and they pile in. Sometimes we overestimate the person on the other side of the trade, especially in small cap stocks. I am talking from experience and keeping a database of these plays.
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