When I first started trading stocks under $10 I only played one side of the trade, the buy side. It didn’t take me long, however, to realize there was a lot of money to be made betting against these hyped up companies. Hype can come from a number of media outlets including stock promotion, the talking heads on television and major media outlets who deliver round after round of speculation to the masses each and every day.
Put out the right story and all of America will buy it. When the excitement and demand fizzles the boat tips, traders start to lock in profits, panic selling sets in and the stock invariably sinks into the ocean often retreating further than the starting point. To take advantage of this you can short sell when the boat is tipping and make money on the Titanic. And what stocks are susceptible to the most hype? Yup, yup my friend you guessed it, stocks under $5.
Take for example the recent rumor that Eastman Kodak (NYSE:EK) was going to sell off their patents. This simple announcement from ‘unnamed sources’ sent EK’s stock flying high to $3.44 in the month of August, 2011 on massive volume. EK is now down 64% since that push. Or how about Justin Bieber touting Options Media Group (PINK:OPMG) which is down 87% from its recent highs. The examples are endless so I won’t go any further with that. Let’s shift gears and talk about what tools you’ll need to get started.
By far the hardest part of shorting stocks under $5 is finding shares to short. You won’t find them at your retail brokers like Etrade so you’re going to need a new account. I recommend Interactive Brokers for this so get setup with an account if you want to short these hyped up, destined to crash plays with me.
Second, you’ll need an account at StockCharts.com so you can scout out overbought stocks. I’ll do a video later on how to setup your custom scan to SAVE you tons of time when searching.
Finally, you’re going to need to know when it’s time to go short because unlike buying, where you can only lose a predetermined amount, shorting is much more risky because there is no limit to how high a hyped up stock can go before crashing. A good example is a one year chart on Lithium Exploration (OTCBB:LEXG) which blew up short sellers accounts back in April. For this you need my premium service which sends Skype, text and email alerts on when to short and when to cover.
So to wrap this up you need the following:
1. Interactive Brokers account
2. StockCharts.com account
3. JasonBondPicks Elite Package