I wanted to post a quick review of the ATHX short trade I did today to make 2k. Not because I think the trade made money, but to share my thoughts that fit most of these low float screamers that move on news. So, here are my thoughts, and learn from it what you will, because nothing is perfect, and there are losers (ACHN for example last week), but here is my process:
Did a scan of this mornings news & saw a few things: There were several biotech partnership and deals this morning on INCY, SGEN to name a couple. When I saw the ATHX news on it’s deal with PFE, I knew this was the stock I wanted to short because what was in the press release & for the possibility that ATHX could get overbought due to the entire sector signing deals.
Here is what I saw in the news: The company said it will receive a cash payment of $6 million from Pfizer up-front and then can receive “milestone payments” for as much as $105 million.
At 8:00 a.m., ATHX opened at $2, up 100% from the prior days close on this deal. The first thing I did was look at companies market cap. At $1, it was 20 million. I knew that this deal could also get hype because it was with PFE. I also knew that to me the only thing guaranteed in this deal was $6 million dollars. Nothing is guaranteed for milestone payments per a typical biotech release.
When ATHX hit $3 at 9:15 eastern, I had to pounce, shorted 5k at $2.98. A 200% gainer due to the name of PFE and only 6 mil guaranteed I figured this would bleed all day. How wrong I was at this entry, as the stock spiked up to $4 bucks within 10 minutes of me shorting the stock. Obviously, I was down 5k before I can blink. HOWEVER, I did several things right & I did not break a sweat, here is why:
1) I kept my position SMALL on first entry. I cannot pound the table on this concept enough on position size and risk management. On a scale of one to 10, this was a 1.5 size position for me. If I was cocky and went big, I would have been smoked. I wanted to short a little more around $4 level, but broker had no more shares to borrow, which I find ironic. ;)
2) I did my HOMEWORK before the trade. Do I understand the news that is moving the stock? Yes, I had confidence I did. Did I review the companies Market cap? Check. Read the press release more than once? (Check, read three times). Any news since I shorted? No, Check. I had full confidence even though down 5K at the open, my thoughts were correct in general and had to wait it out.
3) Did I short near the high of day at the time I shorted at $2.98? Yes. I didn’t chase the short, I caught it right near high, even though it was not he high of course, but I did everything right with the idea.
After the first few minutes, ATHX basically snapped right back to 3.00-3.50 and then did in fact bleed rest of day (Covered at 2.59 in afternoon). Did not want to get greedy and took the hard earned cash because the bottom line is the news for ATHX was good, but not 200% good.
The easy part is taking profits, but the true hard part was 1-3 above. Yes, the trade itself made money, but even if I lost money on this trade idea, the patience to wait for $3, everything about it I liked and would have been ok if was loss because I know if I follow this method on other scenerios like this most will make money.
My belief is shorting is not for everybody, but even if you do not short you need to know when to avoid shortable gaps like ATHX, because whoever bought this morning already down 40% in one day. Trading is not only about making money ideas but also about avoiding mistakes like buying ATHX at the open.
Welsh
