Yesterday, I recommended shorting tight oil stocks into a sizeable pop. I still heavily believe in that trade, but I don't think I will put on a massive position like I would in my youth.
Yes, these companies are very likely to all go bankrupt. In the short term however, they can be influenced by oil prices and can move in a very correlated fashion. If oil opens up five bucks overnight, any shorts in oil companies I have may gap up and I'll be in a very uncomfortable situation. I would be left in a situation where I am either down or breakeven on all of them with the uncertainty of whether the session will fade or rip higher. With a smaller, manageable position I could comfortably add into that pop.
In other words, I'm starting to think of all these oil shorts as possibly being a single position due to the correlation. I need to manage the total aggregate of all these shorts. If I want to take on more overnight risk, I should ideally be looking for uncorrelated positions to reduce the risk and volatility. The best kinds of positions to put on would be longs in stocks that are not in the oil industry. That would hedge me against oil price volatility and general market volatility.
I've been thinking about looking to buy some of these recent biotech runners in a decline for a longer term hold. I think there's a bit of short-term alpha there, but I really want to hedge the high-conviction shorts in these tight oil companies. In particular I am looking at $VCEL and $CPXX. I haven't done enough research on $VCEL but I like the price action. $ELMD is a possible candidate as well since it has pulled back some but remains above its breakaway gap.
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