Home » Behavioural Investing » $SODA Black Swan for Shorts. Case Study in Volatility. $PEP

$SODA Black Swan for Shorts. Case Study in Volatility. $PEP

Soda (Nasdaq:SODA) getting all the buzz this AM. Rumour has it Pepsi (NYSE:PEPS) was going to buy it at a big premium. Everyone really liked the fairy tale and jumped on. So if you are a short here is the perfect Black Swan storm.

First you find a volatile stock which is swinging for the fences. Of course there are a few strike outs. Not everything is smooth in this high beta situation. No dividend in sight so it’s all about capital appreciation.

But wait some smart ass short sellers start to bet against the stock. some 37% of the stock is short. The PE is 32 on trailing so short sound good. Except everyone knows this is not a core holding. This company is being groomed for a big fat sale to a large cap stock with deep pockets who will be seduced by the strategic story. Everyone is waiting.

The stock is near its 52 week high and the shorts own it. Somebody was going to do something. Huge short positions are ultimately bullish as they have to be covered. Someone had the savvy to light the match and a story appears outside the USA but in a sophisticated financial environment.

The dominoes all fall the  right way and the stock surges 4.5% by mid day. Pepsi is denying the rumours but the shorts are panicked and need to cover. The risk had too much beta and not enough profit.

That ladies and gentlemen is the classic short sellers trap. You do not need a real take over. You just need a plausible rumour. The shorts cover the stock drifts down, Insiders load up. The real offer comes. Not too many big buyers make offers into highly shorted situations. They cannot afford the corporate governance ambiguity.

Buy, sell hold. Well if you trade lighten up and enjoy the upward price action then get back in when it drifts down before the real offer comes. this was just a rehearsal.

George Gutowski writes from a caveat emptor perspective. He is this close to buying one of those Soda machines.