Can you imagine buying a stock and waking up the next day only to see that it was up over 1000%? As awesome as that might be, what if you were on the opposite side of the trade and you were short the stock instead?
Most traders know exactly what stock I’m talking about, KaloBios Pharmaceuticals(KBIO). This stock was on many traders list for shorting and many stock newsletters were calling this stock to be over bought and due for a pull back when it was trading around 2.00.
Then this happened.
Overnight the stock went from around 2.00 to over 20.00 in premarket trading. Anyone long was looking at an amazing overnight gain. But if you were short, you were probably thinking that you lost everything you put in the trade…WRONG!
You lost WAY more!
Take this trader Joe Campbell for example, he had about 33k in an etrade account. He decided to sell short a position in KBIO. When he found out the news that the stock was going parabolic he checked his etrade account to find that he was negative way more than 33k.
Here’s a couple take aways we can all learn from Joe. First is short selling stocks is infinite! Joe thought that he could only lose what he invested in KBIO. When you are long a stock, it can go to zero and you will only lose your money invested but it can’t go negative. When short selling though, it can go infinite. So until you decide to cover, it could continue to go up forever. Now that is rare and most traders wouldn’t let that happen and put stops in place. Those stops though don’t automatically work after-hours, so unless you’re watching every minute you could be in the same position as Joe. By the time he saw what happened, the stock had already ran 1000% and Etrade never covered his position. He now owe’s Etrade over 100K!
This is definitely a wake up call for many traders because Joe wasn’t alone but his story became the most talked about because he created a Gofundme to raise money to help pay back E-trade. That became a highly debated topic on whether he should be given handouts for this sort of thing. Either way its an important lesson for many of us.
As rare as these events are, they are still possible. Anytime you decide to sell short a stock, especially low float stocks, remember Joe.