Short Selling “Tell”

Every poker player knows to watch for “tells” — the hints that your opponents are about to pull a bluff or that they have a sure winner.

Lately I’ve been seeing some “tells” from the short-selling community.

As those who follow the blog know, I had a large exposure to ARNA (Arena Pharmaceuticals) before they went before the FDA with their weight-loss drug.  Virtually all my stock had $4 calls written against it, a strategy that lowered my cost basis by a third when I bought it.

I watched in amazement as the stock flew up over $10 a share before the drug was approved, and then with even more amazement as it traded down and stayed down after approval.

Lately it has been recovering in fits and starts, but seems to get smashed back down every time the price goes over $9 a share.

Yesterday and the day before, I got notices that my January $4 calls were being exercised against me in three different accounts.  Each time, the stock tried to rally at the open, and then got sold off pretty hard.

I’m guessing that the short selling community was looking for ammunition, and they called away my stock for that purpose.  For those who write covered calls, this may be a way for us down in the mushroom farm to get an early warning that the big boys are at it again.

Just a guess about why they want my stock two months early.



3 Responses to Short Selling “Tell”

  1. George Maniere says:

    What a great post. That happened to me on EBAY and now I know why.

  2. Bruce says:

    Is it possible that the buyers of the calls like the “bird in the hand” of selling a stock for $8 that they have approximately $5.25 in and they don’t want to give back the profit?

    • hhill51 says:

      Unlikely because the options still had a bit of time value in them, and exercise followed by stock sale is far more expensive than simply selling the options.

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