Escapes with narrow gain in CIEN
This All-Star Commentary post features two Trade Notes from Locogmac (sold short, bought to cover). Thanks for sharing your trades with the TradeKing Community, Locogmac. Your participation has been great!
My cousin mentioned this company last Friday. I have no idea what they do, but they apparently reported ok earnings and so they rose last Friday. Decided to short it as it also was hanging at its 50dma. I'm really just looking for stocks at/around its 50dma that look like its about to fall through. I believe if it hasn't happened yet, it will; all stocks will break its 50dma, and most will also break there 200. - Locogmac sell short entry
Didn't like the movement I was seeing. Too much positive sentiment right now in the market, taking my shorts off the table. - Locogmac buy to cover exit
Locogmac,
Thanks for the posts on your trades in CIEN. I traded this as a market maker back in 2000 - when it was (and many others) a high flyer, before the beginning of the end for the technology sector. Your first trade was to sell short. Let's define this for everyone's benefit. For assistance, I will use TradeKing's glossary, located under Education > Learning Center.
Click here for a larger image.
A short sale is defined as borrowing a security from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price a stock.
Hmmm. What does that mean, exactly? Let's separate the two ideas at work here - open liability and bearish sentiment. First we'll discuss the liability. The term "short" when used in a monetary sense makes me think about going out to dinner with a few friends. The check comes, we divide it evenly, and each person's share is twenty bucks. Your friend starts to look uncomfortable and says, "Hey guys. I am short five bucks. Can one of you cover me and I will pay you back tomorrow?" Selling short is somewhat similar, in that even though a sale is involved (dinner) the transaction has not yet ended (your friend owes you money).
When someone has a bearish opinion on a stock the outlook is for the stock price to fall. To carry out this idea, I may enter a sell short order. When the order fills, and the shares have been sold in the marketplace, the transaction automatically borrows the shares from my broker and the proceeds from the sale are deposited into my account. If I am able to buy the shares back at some point in the future for less than I collected at the beginning, I will keep the difference. Another way to say that is if I do not spend all of the proceeds from the sale when I make my purchase, I get to keep what is left over.
For example you sold 100 CIEN at 27.00, then bought (to cover) 100 CIEN at 26.85
Collected amount (when sold) 2700
Cost to replace shares (when bought) 2685
Difference 15 profit
What happens if I cannot buy the shares back for less? That is the risk in this trade. In fact, if the price of the shares increases, the potential losses are unlimited. The company's shares may go higher and higher, but at some point I have to replace the 100 shares. In this case, the losses can mount without limit until the short position is covered. For this reason, short selling can be a risky technique.
Where does the broker get the shares from? Don't worry about that for now. In addition, there are other things to keep in mind when selling short. The proceeds from the short sale cannot be withdrawn, as I still have a liability (I owe shares). Actually, to make this trade, I must have additional funds in the account equal to 50% (sometimes more) of the total transaction. Since I am borrowing shares, this trade must be done in a margin account, and as such I must pay interest to the broker (for borrowing the shares). Federal regulations require a minimum balance of $2000 in all margin accounts.
I like that you were decisive in liquidating your position (buying to cover). You didn't like the market environment and so you took action and got out of the trade. From your statement, you also recognize that trading is not just about your stock or your position. The larger market sentiment has the ability to derail even the best laid plans.
Have you had a chance to use one of TradeKing's several research tools? We offer a Technical Analysis feature from Recognia (Quotes+Research>Technical Analysis). The current read is CIEN is crossing back over the 50 day moving average, which may indicate bullish activity (below). If you toggle the different displays, you can see the signal in more detail (second image).
Click here for a larger image.
Click here for a larger image.
Many use technical analysis to make better investment decisions. Keep in mind this is merely a forecast and not a guaranteed outcome.
I must say your avatar caught my attention when I first saw it. I do not recognize it, but the style of it reminds me of the 80s cartoon, "Voltron - Defender of the Universe." This may be too long ago for you to remember, but I am sure someone in the Community knows what I am talking about. I seem to be getting nostalgic in making several mentions of 80s pop culture in my last two posts.
Thanks again for the Trade Notes. I look forward to hearing from you.
This comment and any market data were prepared on 3/12/08.
TradeKing Staff
For a list of previous All-Star trades, please click here.
In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk.
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