Before I get to today's Options Jam Session, I want to talk about profiting from bearish moves.
Short answer: It's a hell of a lot harder than it looks.
Few people (with the exception of traders holding short positions) hate it when stocks go up. It is human nature to expect stocks to go up. When stocks are going up, everything is "normal." There's no panic. There are no investor lawsuits. There are no board room freak-outs. Everyone is making money, everyone is happy. Carry on.
But when stocks are going down, people get mad. They look for someone to blame. Big shareholders and institutions start looking for malfeasance and an angle to sue the company for fraud. Star employees get frustrated and leave for greener pastures. Customers lose confidence in the company and start exploring other options. Borrowing costs get more expensive. It gets harder to raise capital in the public markets.
All kinds of bad things happen when stocks go down. So companies deploy all kinds of weapons (some legal, some questionable) to try to stop the stock from going down. They issue buybacks. They issue bullish press releases. The executives go on TV and speak at conferences. They fire CFOs. They hire new CEOs. They explore mergers and acquisitions. Anything and everything is fair game to juice the stock price. Because the alternative is death (or getting fired).
And if enough companies are experiencing rapidly declining share prices at the same time, then the government and Federal Reserve get involved. They issue proclamations. They lower interest rates. They goose money flow. They change the rules. Anything to help companies stabilize their share prices.
So, if this wasn't clear already, it's f*cking hard to make money shorting stocks on anything longer than a day trade timeframe. The world is literally against you.
This was on my mind today as I recently revisited a bearish bet in Hershey $HSY I made back in late October. Here's the chart, with all the gory details:
You can see (blue circle) where I purchased February 175 puts for $5.50 as the stock was losing support. Then you can see where six weeks later I got stopped out on news/rumors of a potential buyout (red circle).
Then you can see what happened next...
It's pretty damn hard to manage risk in a position when you have face-rippers that blow through your stops. It happened to me in December, and it appears to be happening to anyone short today as $HSY has ripped as much as $18 in the face of shorts over the past two trading days.
Yes, had I held the position until now, I'd be up more than 5x my original investment. But would it have been easy? Hell no.
So for those of you pining for a bear market so that you can crush it on the short side, be careful what you wish for. It ain't easy.
I discuss all this as well as the current market environment and a review of action amongst current All Star Options trades in this week's Jam Session. Enjoy:
Sean McLaughlin | Chief Options Strategist, All Star Charts
