Today’s menu

• The Business Insider Story

• Behind the Scenes

  • The Backstory

  • The Trading Strategy

  • The Lessons

The Business Insider Story

You can find the full Business Insider story here.

Sometimes a paywall pops up, requiring you to register to read the whole story. I have included my snippet for easy reference.

The Backstory

I am bearish on SpaceX (in market lingo that means, I think the stock price won’t do well).

So why did I buy the stock?

 Simple. It is one of the few cases where you know a few things:

1. The stock is hyped up.

2. There are Elon fans who are going to buy at any price.

3. The stock is going to be included in various passive indexes. (Basically, a venture capital exit that unwitting investors are going to pay for).

My original intention was to stay clear of the stock. Which is why I didn’t try to get IPO shares, nor did I buy the stock on the first few days of it trading on the market.

But then an idea struck - a bad idea.

While I don’t consider myself a “trader”, it is one of the skills you need as an investor in the stock market. That’s where the execution happens on your good stock ideas. For most people, it’s not an issue because you’re buying too little to make the stock price move. But sometimes, if you are buying a stock that doesn’t trade a lot, you can move the price, even with modest trading.

You need to have a clue about trading because you can easily be “played” by skilled traders in the market.

Anyway, I decided to play the game on day 4 after the IPO.

To be honest, that is coming to the party quite late. I was not going to be able to make the main play, which is buy it on IPO and sell it a few days later to the index funds.

Instead, I was going to trade on the intraday volatility of the stock.

Here’s what I did.

The Trading Strategy

The stock was trading at over $210 per share and dropping.

I made three purchases, at $199.95; $195 and $190. (Notice how I wanted a 5-cent discount on the first purchase - for no reason 🤷‍♂️).

Here’s how the day went, the stock opened at about $210, then fell to a low of $187 and then bounced back to about $198 and ended up closing the day at about $191.

As the price fell my purchase orders were being filled. I was willing to buy more, but it didn’t go low enough. In fact, at about 11am Eastern Standard Time (EST), the stock price started going up. By about 1pm (EST), it had stabilised around $197 - $198.

I realised this was my chance to exit. The position I bought at $190 was profitable and so was the position at $195. I sold them both.

Then my Spidey sense started tingling (probably the warning bells from trading over the years) and I knew I had to sell the $199 position at a loss immediately. I calculated that in aggregate the trades would be profitable if I sold now, but if the price dropped, I would have a loss-making day. So, I exited position three. All-in-all it was a day of modest profit.

The profit is an amount I described as “lunch money” to Business Insider.

By the end of the day SpaceX was down to $191 and in the week that has since passed, you could have bought it as low as $147.

Lucky I was out.

Anyway, as I reflected on the day of trading, I asked myself why I traded it in the first place.

The best answer I came up with is “because, I could”.

The Lessons

Subconsciously, I knew I was playing with fire.

The tangible warning sign was that I used stop-losses on all three trades. Stop losses will automatically sell your shares if the price drops to a certain threshold. I never use stop losses. The fact that I did this time is telling.

SpaceX is not an Extraordinary Company (by our definition) and I knew it was not a long-term hold. I also knew the indexes would be buying in a day later and that I was late to the party. I had a feeling that I could trade the volatile stock price, but I had to exit the same day or I would be caught swimming without trunks when the tide went out.

(That’s me paraphrasing Warren Buffett, who said “Only when the tide goes out do you discover who's been swimming naked”).

I think the tingling Spidey sense, was the realisation that the downward pressure on the price was the “lead steers” starting to exit at a profit before they ran out of buyers.

At the end of the day, I had lunch money and a cool story.

With my sins confessed, my investing karma is now clean and I am back to looking for Extraordinary Companies.

As a final note, this might sound very exciting and premeditated, but there is a huge amount of luck involved in trading. The market can move against you really quickly.

Beware.

Disclaimer: This article is for educational and entertainment purposes only. Nothing in this piece constitutes financial advice or a recommendation to buy, sell, or hold any security. All figures referenced are sourced from publicly available documents. Please do your own research and consult a qualified financial adviser before making investment decisions.