Tuesday, March 1, 2011

Shorting speculative stocks

If volume of put options is in one digit value or even 2 digits do not buy puts. I bought NPSP and I correctly expected it to fall from 10 to 7 but the put volume is very low. Hence I got stuck with the puts. If I rather shorted the stock itself I would have 25% profit.

It is better always to short stocks below 30 day moving average. NPSP was above, but I felt since the pharmaceutical company did not yet make a successful 4 th stage product, the peak was speculative with the 3rd stage success. Most of the time when ever a 3 rd stage news and speculation leads to a 30 or more % gain in stock price, one can look for oppurtunities for shorting.

Contrary to this example, the drug company CLDA made a product that was FDA approved. Shorting this stock would be dangerous because the news of 4 th stage is definite and not a speculation anymore.

Otherwise as a general rule short stocks below their 30 day average only.

Correction with new understanding to the subject of shorting stocks: (3/14/2011). I found out that the rule of 30 day average applies well even to shorting speculative stocks. The only difference is using the 1 month graph instead of using the 1 year graph. Using the 30 day moving average on 1 month graph shows a good picture of when the selling has started. The rule of shorting the stock below  the 30 moving average still applies here but using the 1 month graph as our model. The one month graph is a good model for speculative stocks using the 30 day moving average.

Examples are ROYL and BDCO.

Shorting is a specialized still and one needs to have experience and understanding of the stock movements well before getting into it. If the stock moves against us, one can get severe losses.

But the understanding and shorting stocks, I think the 1 month model, gives a good understanding of
buying and selling pressures.

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