LinkedIn got bought by Microsoft today, and within a few seconds of the markets opening, LinkedIn has rocketed up by 47%. I am wondering what happens under such conditions to people who were caught short at market opening. Is there enough liquidity available for them to buy and exit quickly? On a related note, what precautions should swing traders take while shorting?
"What happens..." 1. Maybe you get stopped out close to your stop price. More likely, you just eat the most of/the entire move against you. 2. Having an "offsetting" position to hedge against a big and sudden move... like being long calls/puts.
If you didn't trade the right instruments (option spread, hedging etc.) then you have a big problem I would say... Precautions? Some options stratetgies have built-in hedging. And some of these strategies not even just protect, but also do profit big from such unexpected extreme situations.
Yes. The "problem" with hedging is the cost. If you have a proper hedge on when it's critical, it's more than just a "life jacket". Problem is the cost. If the hedge goes unused, it hinders returns and/or drains capital. Yet another example of, "there ain't no free lunch". IOW... you can't protect yourself "for free".
Do it like an insurance company: work strongly with probabilities, then, especially with some cheap OTM options, you can get the protection you like and can afford.
...What do you think happens...They get F'ed up the A. That's like stepping on a land mine...if you're lucky...you will only lose one limb... It's trench warfare out there, pal.”
I would buy Puts on LinkedIn after it made huge move up, that kind of move often short lived. Since there are few takeovers of this magnitude, and swing traders going to stay in short term, hedging every short would really cut into profits in big way. Wouldn't it?