Short Position, page-70

It is understandable that one looks for someone to blame in a falling share price when the fundamentals clearly indicate we should be rising, however these discussions show much ignorance on financial market mechanics.

As we approach some serious value inflection points, (if we are being truly honest these trials are not a sure thing until the data release) big players need a derisked strategy. They are not here for speculation and high risk strategy, they are here for low risk and sure $$. They will take a 95% chance at 5 or 10% gain than a 50% chance at 100% gain. So while they know they want to be in IMU for as much as their portfolios allow, how do they, at the same time, decrease their risk in the specific situation that is IMU?

One such method is hedging. Hedging has several uses, however one of the main ones is for this scenario. This is allows you formatting maximum exposure with very little risk. Allow me to illustrate with a made up example:

Mr Big likes what IMU are doing, but doesn't like the idea of buying in pre-data release. His investment plan dictates that he can only risk X amount, which means that he can only buy 10million shares at an average of 25c, because if the trials fail and IMU tanks then his loss is maxxed out at X. However, Mr Big wants 100 million exposure because he really likes the possibilities, but he knows that he can't afford to buy 100mil after a positive trial result, which he believes will be the case like most of us. Mr Big goes about his buying and selling over the next couple of weeks/months so that by the end of it, Mr Big now owns 100mil shares with an average price at 25c. Mr Big, throughout his weeks and months of buying and selling also sold all of his 100mil shares short at an average of 23c without ever risking more than X. He has now hedged in his entire position, and no matter what happens, positive or negative, he maximum loss is capped to 2c (in this example 2c represents 2/25 * X).

Now comes the day of the data release, and it turns out to be a disaster of epic proportions and the share price drops to 0. He loses his 25c buy, but at exactly the same time he profits 23c on his short. If he closes out his position, he has a total paper loss of 100mil at 2c, the difference between his average buy and average short. No where near as big a disaster as the trial. Risk averted.
On the other hand, the data released is amazing: cancer cure news headlines around the world. The price spikes to $1. Does Mr Big now have to scramble to cover historical short position? Will he burn like many hope for? No. Mr Big has gained 75c on his average buy and lost 77c on his average short. This leaves him with the same 2c loss paper when he closes out his short. The difference now however is that Mr Big is exposed to 100mil shares long of IMU and the trial is now risk averted that the data is out.
In either scenario, Mr big has gained the maximum exposure he wanted with a minimal 2c risk.

This seems a likely scenario to me as the shorts have steadily increased, in fact the % of the days trade as shorts seems to be increasing. This will likely continue to the value inflection points, where following the retrace of the news spike the shorts will likely evaporate ad they are covered by their own portfolio which will unlikely create much price movement. I'm not saying that this is what is happening, however it makes sense to me and fits the picture. The positive to be found is that that for there to be such a large amount of shorting means there is some very serious money interested in IMU and its future. I'll be sticking with them and holding on to my shares.