Here are the facts:
- After the financial crisis, the SEC created rules to help protect long-term investors
- This was done to maintain investor confidence & to prevent large intra-day crashes
Don’t believe me? See for yourself:
I know you aren’t going to read that, so let me summarize:
- If a security drops more than 10% in a day, a short sale circuit breaker is triggered
- The breaker lasts 2 days (current day through end of “next-day” trading session)
- The rule gives priority to long sellers and imposes an uptick rule on additional short sales
- An uptick rule means that to sell short, your “ask” must be at least 1 tick higher than the current “national best bid”
Here’s a quote directly from the SEC document:
“We believe it is appropriate at this time to adopt a short sale-related circuit breaker because, when triggered, it will prevent short selling, including potentially manipulative or abusive short selling, from driving down further the price of a security that has already experienced a significant intraday price decline, and will facilitate the ability of long sellers to sell first upon such a decline.”
Why is this important?
- Because price can’t be driven down further for at least 2 days
- This usually leads to a rebound / reversal rally
Let’s take a look at what happened to Tesla
- Tesla triggered the circuit breaker at 11:39 on Friday
What was the price at 11:38?
- Approximately 700
Now let’s take a look at what happened the rest of the day:
- Notice how it struggled to stay below that amount
- For put holders, always look to exit within the next 10-20 minutes after this triggers
- This will likely be your “max profit”
Now what happened today?
- Tesla mooned to 769… 10% gain
- Without any downward pressure, the rebound easily gained momentum and continued throughout the day
Before you criticize me.. I’m fully aware that there are other rules / regulations that also play a role.. I just wanted to point out one of the reasons why Tesla mooned today..
If you want to beat the exchange, you need to understand every rule… inside and out
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.