The amount of “irrational exuberance” is simply amazing in the US stock markets. I am always amazed by such eternal positive spirits. In fact, going against irrational exuberance has hurt my performance several times, back in 2000 near the high-tech mania, and back in 2007 May/June, right before the stock market collapse. I was forced to stop my horrendous losses, whenever my shorts were initiated too early.
After 10+ years of experiences, I am truly in awe of the human stupidity. And I learned not to be greedy. So this time, I have sold December 2009 $3.00 calls for just 9000 shares (or rather 90 calls) when GM shares were trading around $1.60. I actually shorted GM at about $35 back in 2007, and was forced to stop loss at $40. Anyway, GM should have gone bankrupt years ago in my opinion.
Going through some of the messages on Yahoo’s message board for GM, I can see that there are many retail traders in GM. For one thing, I know whoever is trading GM in a regular retail account, most likely, initiate the trade from the long side (by buying first). Why? Many brokerages that are available to retail traders have a $5 rule, not allowing people to short stocks below $5. So in order to play or trade, you will need to do it by buying first. Secondly, GM shares mostly cannot be borrowed at all (because it’s heavily shorted at about 20% of the float). With the exceptions of hedge funds and the big guys, where they can do whatever they want including FTD (failed-to-deliver) to short without borrowing shares, retail investors simply cannot short. I was able to short GM via selling naked calls on GM. This option also is not available for most retail/online brokerages (except through qualified accounts at TDAmeritrade and InteractiveBrokers). You can see that the play is not stacked up fairly for retail traders.
In 1999, I was daytrading a low price stock for just a penny difference on Etrade. A penny was enough profitability for me. Eventually after a couple of months, the company went bankrupt. Even though I’ve successfully earned 1 penny profits for probably more than 20 times, a single bankruptcy event wiped out all of my profits and then more. So I made a trading rule for myself: never ever touch a company that can potentially go bankrupt from the long side. Doesn’t matter how fast or how smart I think I can be day-trading or minute/seconds-trading (that’s how long I was trading), if my position in the market is on the wrong side, then it’s simply a big open invitation for Murphy’s law. Unfortunately, I bet that this is the lesson that every traders/investors including all the traders that got stuck in the bankrupt GM, that need to learn for themselves.
Another trading rule that I want to share is “don’t be greedy”.
