Can one short a market leader?

Just came back from a busy trip and thought to write something that is fast moving.

 

You probably often heard this kind of statement and I was even told that this is the trading 101 that one should not short a market leader. Really? If someone tells that with certainty, then he is either an ignorant who does not really understand what is trading about or even foolish! Here is why.

 

Trading is mostly about short term speculation on a temporary trend that may or may not last long. You may have heard about swing trade, which is basically to bet for a short term fluctuations of a stock. Regardless how strong a stock is in its uptrend, it would be foolish to think that it will only go a straight line up. There is basically no such thing in the stock market. So to me anything can be shorted, strong or weak. It is not a matter of whether or not market leaders are “shortable”, what really matters is how one short them at the right time. No doubt it is extremely dangerous to short a market leader outright or naked as a sudden trend change can wipe you out. We are just witnessing a real life example last week. It is about NVDA, the Street darling and a clear market leader for the past year. But even a great market leader like NVDA may go too much ahead of itself from time to time and it could be a good short candidate when it goes into a short term downtrend. I have talked about my shorting on NVDA a few times here. It was clearly trending down in the past couple months and I took the opportunity to short it. However, I definitely did not short it naked. As I said, I had a clear exit point for this trade with the understanding that NVDA is a great company and may jump high easily. The sand line is $175 for me, as above it, it would break out the downtrend line and likely will resume its uptrend thereafter. While I was not expecting the trend would change so soon, it did so about a week ago following a very bullish upgrade by an analyst. NVDA bulls were certainly happy to hear that and they pushed the stock up by $20 in two days, from $170 to $190. Congrats to those being long on NVDA. The real pain should be those who aggressively shorted NVDA outright as this $20 jump would have certainly kill them. I think the large part of this up run was likely due to a short squeeze, namely those who shorted NVDA naked had to buy to cover their shorts to minimize further pain or loss. But this sudden trending change does not mean everyone who shorted NVDA must have experienced a great pain. If so, I’m an exception :)

 

As I have explained in more detail before, I took a stepwise approach to set up my combo short position, aiming to gain a lot if I’m right and lose little or no loss at all if I’m wrong. As presented, my current combo short position has locked me in for a certainty of gain regardless how NVDA goes, i.e. no downside risk whatsoever for me. As such, I don’t need to rush to cover my short. Actually I’m still holding my combo short position as of now, giving the rationale that I believe this sharp up move was more to do with short squeeze and if so, it may come down soon. My plan now is to cover my short arm when NVDA indeed retreats from the current high and will keep my long arm to its maximal gain. If it goes well as planned, my net result will still be a great profit even though the trend has changed against me now. To further enhance my potential gain expecting a quick “correction” of NVDA, I even entered a new bearish call spread that will allow me to gain if NVDA did not go beyond $190 in the near term. I believe NVDA may come down towards $175 in the next week or so and I’ll unwind my short positions totally if that happens. Of course, by no means I will continue to short NVDA for a sustainable period as the market has clearly told me, it wants NVDA to go up moving forward. When the market speaks, I listen and change my mind accordingly!