The purpose of this column is to explain my risk profile and how my approach to shorting stocks keeps me in the game, even when I am terribly wrong on a stock.
Its year-to-date advance has also been breathtaking.In several posts, I outlined why I was shorting Tesla this year. In shorting Tesla, I recognized that I went directly against my short selling tenets that preclude me from shorting a stock on valuation and when short interest is high relative to float and to average daily trading volume, but sometimes you just have to make an exception if a situation is viewed opportunistically. To summarize, I began to short Tesla at around $205 when the stock rose on a combination of modestly better-than-expected earnings and rumors that Apple (AAPL - Get Report) had discussions with Tesla. The latter point was plain foolish to me and provided a price gap that I felt delivered a reasonable short entry point. I shorted more Tesla on a gap up to $220 soon after and covered some stock on a dip back to $207. But the first several shorts were small, as I almost always average in, especially when dealing with a high-octane stock such as Tesla. The share price continued to rise to $240 where I got more serious in shorting the shares. As the share price rose to over $260, I continued to average into the short. At around $251 I covered some of my high-priced shorts, and at $236 I covered the majority of the balance of my short. I recently added (small) again at around $256. The sum total of my loss in the short of Tesla has been negligible, literally a rounding error in the scheme of my overall investing activity. The lesson: Recognizing the mania and the stock's volatility, I started slow (and small), expanded the short modestly on strength, traded around the position often and sized the position properly.
This column originally appeared on Real Money Pro at 10:04 a.m. EST on March 6.