Zapped by TASR
Ok, that was stupid.
The funds have cleared and I was itching to short this market. It always feels the worst seeing the market move without you, particularly when youíre waiting to enter.
My first trade was to short 100 shares of Taser (TASR) at $26.71. The chart is broken, itís over-hyped imo, and holding up during the downdraft. So I figured itís worth giving it a shot. No dice. I got stopped out at $27.75. So a hundred bucks down the tube. Back to an earlier discussion in the comments section, stop losses are important with volatile stocks. Sucks to learn the hard way, but hey another mistake you can learn from me.
So licking my wounds, I put on a new trade, this time a pair trade long Amazon (AMZN)/ short Overstock (OSTK). I got 100 shares of Amazon at $41.65, and shorted 150 shares of Overstock at an average of $32.05.
The idea behind pair trades is that you try to minimize market volatility and instead rely on stock picking abilities. You donít care whether the market goes up or down, you just want your long to outperform your short. In this case, Iím betting that Amazon.com will outperform Overstock.com. Ideally, you want your pairs to be in the same industry with similar volatility. So if the market completely tanks, the decline in your long will be offset by a similar gain in your short. In a perfect world, your long will go up, and your short will go down, but in a perfect world, Iíd be an NFL quarterback.
My thesis behind the Amazon/Overstock pair is that Amazon has upside in a rally, but Overstock has less upside. In a market meltdown, Iím betting that Overstock has more downside than Amazon. So the main thesis on this trade is more technical than anything else.
Fundamentally, Iím betting that Amazon has more clout than Overstock. Amazonís gross margins are in the range of 22-24%. There are worries that Amazon will sacrifice their gross margins to gain market share. But compared to Overstockís 10% or less margins, Amazon has the upper hand in this category. Look at their products, Overstock.com is just that, they sell stuff people didnít want to buy Ė and their savings arenít *that* good. I use Amazon, I love buying from Amazon. Itís not the most scientific of reasonings, but itís a good place to start.
More later, my day job beckons.
Update: I changed the symbols in my post to the name of the company to make it easier to read. Itís a mental shortcut that makes it easier to type up too.
Overstock priced its secondary tonight at $30.50. Itís one of the catalysts I was looking at since more supply on the market generally puts a cap on a stock at least for the short term. It will be important to see how the stock trades after the secondary, particularly if it can hold the secondaryís print price.