Trading Strategies. Short-selling stocks after an offering announcement.
When company issues additional shares it causes the dilution. In most cases (exceptions are listed at the end of the article) it leads to the significant drop in the share price.
If the offering is priced already — that’s usually the level current share price will drop to (in some cases even below that level).
If the offering is not priced, but the size is announced in total $ amount or quantity of new shares to be issued, you can do the math. Total $ amount vs market cap or new shares vs existing shares, — that’s pretty much the % the stock price would drop by.
To avoid huge volatility during market hours, companies usually announce the offering after the market is closed (after 4PM). That’s the time when I start monitoring the news. I use Squawk Box and Breaking News board from Transparent Traders https://www.transparenttradersblackbox.com/?afmc=54, Moomoo News board,
If the offering is priced already — that’s usually the level current share price will drop to (in some cases even below that level).
If the offering is not priced, but the size is announced in total $ amount or quantity of new shares to be issued, you can do the math. Total $ amount vs market cap or new shares vs existing shares, — that’s pretty much the % the stock price would drop by.
To avoid huge volatility during market hours, companies usually announce the offering after the market is closed (after 4PM). That’s the time when I start monitoring the news. I use Squawk Box and Breaking News board from Transparent Traders https://www.transparenttradersblackbox.com/?afmc=54, Moomoo News board,
Yahoo Finance News https://finance.yahoo.com/news/ and Google News https://news.google.com/.
After the news is located, I open up the chart and check all the news for this ticker to make sure it’s new news and market hasn’t reacted to the news yet.
If everything looks good, I’ll short the ticker and watch the price action further. If there happen to be a dead cat bounce, I’ll add to my short position. If the price drops significantly or to the secondary offering price, I’ll close my short position for profit.
I might close the position same evening or hold overnight and close pre-market the next morning. I prefer not to hold till market opens as market makers might have their own plans for this ticker and I prefer not to risk my winning position.
Sometimes the offering announcement comes out without any details “company is planning additional stock sale, size or price is not disclosed”. This news very likely will lead to the stock price drop, therefore I’ll open shot position right away. Additional details (size or pricing) usually come out either same evening after afterhours trading closes (after 8PM) or pre-market next morning, giving me clear understanding at what price level to cover the short position I have already opened earlier. However, they might not come out for the few days. In this case, I will close my short position before market opens.
When can it go wrong?
1) You are shorting old news. Offering was already announced and market has already reacted to it.
2) I do not touch overhyped stocks — that ran 20–100% pre-announcement. Hype might be stronger than common sense.
3) Read the announcement carefully, make sure you are not mistaking secondary offering with private sale, debt placement, tender offer, shares conversion, etc.
4) Some stocks are not being traded outside of market hours. The ask/bid spread will be wider than potential drop on the news. I usually place a sell order at what I think is reasonable price, if it’s not filled same night or premarket next morning, I’ll cancel it and not trade that ticker at all.
Shelf registration filed might also lead to the stock price drop due to expectations of further delusion. However, this news and reaction to them is not as strong. Shelf is a statement that company might issue additional shares from time to time in the future (might not happen for a while). I do monitor shelf news too, but would watch the market reaction prior to opening my short position.
Small companies might not make it to the news board. To catch those I read through the SEC filings https://sec.report/Form/
S-1 prospectus
S-3 shelf registration
424B amendment to the prospectus
8-K news release
P.S. If the info above seems to be too complicated, start here: How I learned how to trade https://link.medium.com/7Jaqk1NsJbb
1) You are shorting old news. Offering was already announced and market has already reacted to it.
2) I do not touch overhyped stocks — that ran 20–100% pre-announcement. Hype might be stronger than common sense.
3) Read the announcement carefully, make sure you are not mistaking secondary offering with private sale, debt placement, tender offer, shares conversion, etc.
4) Some stocks are not being traded outside of market hours. The ask/bid spread will be wider than potential drop on the news. I usually place a sell order at what I think is reasonable price, if it’s not filled same night or premarket next morning, I’ll cancel it and not trade that ticker at all.
Shelf registration filed might also lead to the stock price drop due to expectations of further delusion. However, this news and reaction to them is not as strong. Shelf is a statement that company might issue additional shares from time to time in the future (might not happen for a while). I do monitor shelf news too, but would watch the market reaction prior to opening my short position.
Small companies might not make it to the news board. To catch those I read through the SEC filings https://sec.report/Form/
S-1 prospectus
S-3 shelf registration
424B amendment to the prospectus
8-K news release
P.S. If the info above seems to be too complicated, start here: How I learned how to trade https://link.medium.com/7Jaqk1NsJbb
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Ming-ChiKuo Tracking : woooooow!
finance_analyst OP : @Popular on Moomoo@TeamMoomoocould you please tag my article to #Teach and learn together ? Thank you!
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Popular on moomoo finance_analyst OP : Done!
treydongui : this is in excellent strategy and it is well laid out. excellent. ty