Adult Swim Versus the Triple Lindy

With little biotech KBIO up roughly 400% today in a massive squeeze of one now-infamous short-seller in particular, it is worth reiterating that I am not a fan of short-selling without specific distinctions and elements met before even considering the trade. In this day and age of social media and taking things out of context, to throw short-selling entirely under the bus now is foolish.

Shorting adds liquidity to the marketplace, aids in price discovery, and helped reveal frauds like Enron. When shorting was banned on select financial stocks in September 2008, the market wound up crashing within a few weeks due to the lack of buyers (shorts who close out or "cover" their positions are essentially buying back the stock they borrowed to short in the first place. 

Moreover, the reason why those financial stocks were crashing down 20-30% a day in 2008, when it became chic to blame "short-selling speculators manipulating the market" is because those banks were, in fact, insolvent and bankrupt firms who needs the like of Warren Buffett and Uncle Sam to save them for going to zero. If they were healthy firms, the market would not have permitted shorts to pound those stocks every day. 

But when shorting is done in a cavalier and gunslinging manner, without respect for its inherent risks, a KBIO scenario can and does happen. The purpose of this post is not to pour salt in the wound or "pile on," but rather to shed light on a few important points. 

I have written about this before but when you see a story like this, it worth driving home those said points which often become mangled to newer traders and even veteran ones who abhor any form of shorting, at all. In reality, selective, disciplined shorting is still "adult swim" and quite difficult. But shorting a name like KBIO outright, via common, is making to performing the Tripe Lindy every day, like the film clip above. 

Unless and until we enter an established bear market in equites, with declining 200-day moving averages above price on most or all major indices, it is worth adhering to the following criteria:

1. Shorts should largely focus on large cap, reasonably high priced liquid stocks, where risk of getting squeezed with a low float and heavy short percentage of the float is mitigated. 
2. The larger the market cap (over $30-$50 billion, for example), the better, as buyout risk tends to decrease. Using puts in lieu of common stock, with disciplined position sizing with options (a topic rarely covered in this day and age of social media) helps to define risk in lieu of the KBIO short-seller example. 
3. Protective cover-stops above recent swing highs which are respected are a must. You do not want to build a losing short position without a broad bear market established, if at all. 
4. Position sizing is your first and last line of defense in risking your capital. But in the case of shorting common stock it can become even more treacherous as losses can be infinite.  Hence, the focus on stop-loss management. 
5. Biotechs are a special case. Unless you are a specialist and extremely well-versed in the sector from a fundamentals (and FDA) standpoint, it is likely to correct to avoid shorting any biotech less than $10 billion in market cap. The risk of  surprise, massive move like KBIO is simply too much to justify. 
6. Bearish, leveraged ETFs are TRADING VEHICLES ONLY. not buy-and-hold instruments. They decay almost like options do, and are not "safe alternatives" to shorting individual stocks, per se, if you do not have a sound game plan beforehand.