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Trader loses 130k+ on short, owes eTrade 100k
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Trader loses 130k+ on short, owes eTrade 100k

  #41 (permalink)
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jodistrict View Post
He says he is a fairly new trader. He shorts 8,400 shares of a high risk stock to get a maximum $2 profit with unlimited risk. But then he says that he will be back trading. This is insanity. He should be on a simulation for a minimum of a year and learn how to trade. He will just lose whatever he trades. His wife is paying for his addiction. I feel sorry for her.

I agree. There is a seed of wisdom in your reply. Of course everything is very personal so it is not a good idea to generalize too much but in my case I lost 20K in my very first "day trading" positions and that put me into 5 year learning curve without any live trading (just planning, reading and training in simulator).

I was lucky to understand immediately that I had NO IDEA what I was doing. Today after over 15 000 hours on the markets the situation is a bit different but still I cannot save myself from the very, very bad luck.

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  #42 (permalink)
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Big Mike View Post
Some people are also really weird.

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Mike

Agreed..

Contacted him already

As for the guy in the OP - shorting a $2 stock isn't very smart but there's a lot of stuff being sold about trading penny stocks to make a fortune. The trading education industry is completely unregulated and we don't really know if this guy is a victim of that or just a little reckless.

I suspect it's the former. It'd be very interesting to know where he learnt how to trade.

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  #43 (permalink)
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Many people got burned with this one. Our study group traded KBIO on the same day, but it refused to fall, so we were out by late morning. Someone from Kunal's gang reverted long catched a big one.

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  #44 (permalink)
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jodistrict View Post
He says he is a fairly new trader. He shorts 8,400 shares of a high risk stock to get a maximum $2 profit with unlimited risk. But then he says that he will be back trading. This is insanity. He should be on a simulation for a minimum of a year and learn how to trade. He will just lose whatever he trades. His wife is paying for his addiction. I feel sorry for her.

This is a black swan event. Some people won't have it in 10 years, not in just one year of demo trading. I assume he knew what he was doing and had been lucky before. Stops won't work in after market anyway, but should he kept an eye on it - he could exit - there was no crazy rise, but actually gradually with small pullbacks - i.e. there were some offers to close against. Experience will hardly teach about those events - one who catches it will be out of business, and those still in are probably never had one. Same like with Swiss frank meltdown or before that Fukushima yen meltdown. One must just exercise caution and be aware about the danger. IMO

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  #45 (permalink)
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eudamonia View Post
That's a tough market lesson indeed. I've made some pretty big mistakes when first trading but nothing on that level.

As you say, leverage (too much) and diversification (too little) are the key lessons there. Also, these types of stocks can be extremely volatile. If only he had decided to buy puts instead or covered his position with some likely cheap call protection...

I assume there was not leverage involved. I also think he did not even invested 100% of his capital in the trade. For 99% of times what he did was almost conservative.

If he put full his 37k in shorts at 2$ and price went to 18$ where e-trade closed him out (it went as high as 25$) - he would lose over 300k. Instead his lost 144k, so he must have put only 16k out of his 37k account in use. This is something truly tremendous move that happened, a real black swan. LTCM was nothing short of geniuses but it fell same way.

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  #46 (permalink)
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xelaar View Post
This is something truly tremendous move that happened, a real black swan. LTCM was nothing short of geniuses but it fell same way.

Trading biotech stocks one should always be prepared for such an eventuality. Whenever new drugs get approved (or not approved) by the FDA most stocks always tend to always have big runs (or drops). Unfortunately the stock has no options, so he could not have hedged part of his risk with calls. Shorting a biotech stock with no way to effectively limit risk was a pretty risky move.

Another recent example of a truly spectacular move is WTW. These moves happen often enough that I would not really call them black swans. CROX is another scary example of a huge drop overnight which happened a couple of years ago. There are really too many of these type of moves for me to recall, but these type of moves happen more often that they should, and if you don't have hedges, i.e. options, in place then you can get badly hurt.

I have also just looked at KBIO - final traded price is 2.07...man, that must hurt...

Regarding LTCM, I would argue that it was not a black swan that took them out. Rather, they were betting on their arbitrage models working and kept on increasing their bets until the whole thing collapsed. Had their positions been of normal risk, they might have ridden it out and merely suffered a large loss. Instead, they martingaled into the position and it snow-balled from there.

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  #47 (permalink)
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grausch View Post
Trading biotech stocks one should always be prepared for such an eventuality. Whenever new drugs get approved (or not approved) by the FDA most stocks always tend to always have big runs (or drops). Unfortunately the stock has no options, so he could not have hedged part of his risk with calls. Shorting a biotech stock with no way to effectively limit risk was a pretty risky move.

Another recent example of a truly spectacular move is WTW. These moves happen often enough that I would not really call them black swans. CROX is another scary example of a huge drop overnight which happened a couple of years ago. There are really too many of these type of moves for me to recall, but these type of moves happen more often that they should, and if you don't have hedges, i.e. options, in place then you can get badly hurt.

I have also just looked at KBIO - final traded price is 2.07...man, that must hurt...

Regarding LTCM, I would argue that it was not a black swan that took them out. Rather, they were betting on their arbitrage models working and kept on increasing their bets until the whole thing collapsed. Had their positions been of normal risk, they might have ridden it out and merely suffered a large loss. Instead, they martingaled into the position and it snow-balled from there.

Well, this is true, but not 1000% moves overnight. There are examples like CYNK, AVXL etc but these moves took time. This stock is true pump but we all know how bubbles work. I think him trading with E-Trade is a part of the problem as well, as per his description they were quite incompetent, and presumably he could not get out through the platform himself.

Agree about LTCM, what I mean by a black swan is that their spreads went wider than their model could have predicted, a classical fat tale case, and by this time profits were so tiny they did over-leverage beyond any reason.

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  #48 (permalink)
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xelaar View Post
Well, this is true, but not 1000% moves overnight. There are examples like CYNK, AVXL etc but these moves took time. This stock is true pump but we all know how bubbles work. I think him trading with E-Trade is a part of the problem as well, as per his description they were quite incompetent, and presumably he could not get out through the platform himself.

Agree about LTCM, what I mean by a black swan is that their spreads went wider than their model could have predicted, a classical fat tale case, and by this time profits were so tiny they did over-leverage beyond any reason.

Yes, most of the time these moves take time, but there have been several examples where there have been quite big overnight gaps. WTW gapped up close to 100%, CROX dropped something like 80% overnight (memory sketchy so may be wrong). I have seen others with quite a few being in the biotech space, so one should always tread carefully. To cover these type of risks, most of my positions will be protected using options. If a stock does not have options, then trading a lot smaller may also be an option, i.e. keeping size below 5% of the portfolio. The longer I am in this game, the more risk-averse I become - the number of "black swans" I have seen are already way too much for me to be comfortable with.

According to the book "When Genius Failed", they needed to add additional leverage to reach their target returns of 40% p.a. since others were copying their models. However, they probably would have survived if they did not martingale once the spreads kept on widening. Of course, the more spreads widened the more likely they were to narrow and thus LTCM kept on adding to their positions. Sort of reminds me of a fund manager lamenting after the Enron collapse, "the more it fell the cheaper it became with regards to our valuation, so we naturally bought more" (or something to that effect).

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  #49 (permalink)
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grausch View Post
Yes, most of the time these moves take time, but there have been several examples where there have been quite big overnight gaps. WTW gapped up close to 100%, CROX dropped something like 80% overnight (memory sketchy so may be wrong). I have seen others with quite a few being in the biotech space, so one should always tread carefully. To cover these type of risks, most of my positions will be protected using options. If a stock does not have options, then trading a lot smaller may also be an option, i.e. keeping size below 5% of the portfolio. The longer I am in this game, the more risk-averse I become - the number of "black swans" I have seen are already way too much for me to be comfortable with.

According to the book "When Genius Failed", they needed to add additional leverage to reach their target returns of 40% p.a. since others were copying their models. However, they probably would have survived if they did not martingale once the spreads kept on widening. Of course, the more spreads widened the more likely they were to narrow and thus LTCM kept on adding to their positions. Sort of reminds me of a fund manager lamenting after the Enron collapse, "the more it fell the cheaper it became with regards to our valuation, so we naturally bought more" (or something to that effect).

Indeed I agree with your, but this is the whole business model, the whole idea of this sort of trading - short the hell out of pumps that seem to start cracking. My point simply is - nobody could have expected it to jump 10 times, nor there are any precedence, 100-200% yes, but not 1000%. What I am saying - no experience nor demo trading would have prepared any trader for that situation, only his own sanity and understanding the nature of the game. He would still lose very big, just not that big. It happens. And a chance of it happening to you is far less (IMO) than being killed by a car. We take care when we cross the street and improve our chances, but not to 0 anyway.

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  #50 (permalink)
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I cant find 1 share of this stock to short. There is none to borrow anywhere. I cant understand how Etrade let him short 9000 shares unless Etrade took the other side of his trade. This whole story sounds bogus to me.

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