Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.
On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.
For those who don't have the time to tune in live or listen to the podcast, Benzinga will highlight one stock that merits further discussion. This analysis is not a buy or sell recommendation.
On many occasions, the PreMarket Prep hosts strongly discourage shorting stocks that are making new all-time-highs, as it hard to identify an out if the trader is wrong.
But there are exceptions, and co-host Dennis Dick outlined and traded a profitable short sale Tuesday in Tesla Inc. TSLA, the PreMarket Prep Stock of the Day.
The Tesla Setup: With Dick being an astute follower of the after-hours action in many stocks, but especially momentum stocks, it was easy to recognize the insane price action in Tesla after the close Monday.
As Dick witnessed the follow-through from Monday’s $162.92 rally, which was preceded by Thursday’s $89.03 rally, he was licking his chops to short the issue. Near the conclusion of the after-hours session, Dick said he made note of the after-hours high of $1,433.99 and was going to incorporate that into a potential short sale of the issue Tuesday.
The Tell: Since momentum stocks often trade together, he witnessed the early price action in Amazon.com, Inc. AMZN, which peaked just after the open Tuesday and had a sharp decline.
In anticipation of Tesla replicating that move, he placed a short sale order at $1,323.80. The reason being: Dick was willing to risk roughly $10 and cover in the area of the premarket high.
He was instantly $6 underwater when it raced to $1,329.50, but was aware he had to get in on the way, as it would be extremely hard to to catch in a downdraft.
The Cover: Based on the fact that Dick was risking $10 on the trade, a cover of anything less would be not be within risk-reward parameters.
Therefore, when the issue fell under $1,400, he covered half of the position at ($1,380), for roughly a 44-point gain, which exceeded his original risk-reward scenario.
While we were conducting our post-show call Tuesday, he was contemplating where to cover the remaining piece. As the issue was trading in the $1,240 handle, I mentioned a potential support at the $1,340 area based on Monday’s price action.
Dick opted to cover one-quarter at $1,343 and was stopped on the remaining quarter of the position on the way back up at the $1,370 area.
His overall average gain on the position come out to $51.
The Takeaway: Shorting stocks that have gone parabolic is an extremely difficult thing to do — and when to cover them if it becomes profitable is even more difficult.
Invoking the right risk parameters and sticking to them is a good start. Also, covering the positon in pieces can make for a desirable average price on the return.
Keep in mind that that Tesla traded down to $1,336.71, but has now rebounded back to the $1,400 area.
The stock was trading 1.52% higher at $1,392.37 at the time of publication Tuesday.
In the event that Dick he did not cover, the trade would still be profitable— but not by nearly as much. The full discussion on the issue from today’show can be found here:
Photo courtesy of Tesla.
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