Short-Selling Without a Hedge? This Trader Tried It and Now Owes E-Trade $106K

Short-selling a stock can be extremely risky without establishing a hedge against a big move, such as buying call options on the same stock.

But Joe Campbell, a 32-year-old small-business owner from Gilbert, Arizona, wasn’t too worried when he went to bed after short-selling about 8,400 shares in KaloBios Pharmaceuticals — at an average price of a little under $2 on Wednesday.

Campbell had $37,000 in his E-Trade online brokerage account when he went to bed. But by the time he awoke, his money was all gone and he owed E-Trade more than $106,000. KaloBios shares had surged to $16 after the controversial former hedge fund manager Martin Shkreli had bought a stake in the company. E-Trade informed Campbell that he had to cough up $106,445.56 as part of a massive “margin call.”

“Short” bets are always riskier because there is really no limit to potential losses if the stock soars, which may be rare but it can happen. Campbell’s move was even more dangerous because he held the position overnight. Experienced short-sellers will establish a hedge to avoid such financial calamity, most often a combination involving equity options. Stop-losses can also help, but are not completely reliable in fast markets or with overnight developments.

Campbell is so desperate to recoup his losses that he established a GoFundMe page for people to help him raise the money he owes E-Trade.

Here is a portion of Campbell’s story as he told it on GoFundMe:

At the moment not only is my $37k gone, but I now owe ETrade the negative balance of over $106k. I always knew I could blow up an account and I was financially able to “afford” to lose the $37k. Never in my wildest dreams did I imagine that Etrade would NOT have some sort of stop or circuit breaker in place that would automatically cut a position if the account went to $0… could they ever let it get to -$144k loss on a account that small! Also, why did I have to call them to find out what was going on, why did they not alert me or call me when it went neg???

I’m never one to ask for a handout and honestly I’m kinda not sure if I should post this but here we go. I’m sure it will cause lots of controversy on whether or not I deserve even a $1 donation but it doesn’t hurt to ask. Anything you traders can do to help me get a little out of this hole would be a blessing for me. Anything donated will go 100% to simply paying Etrade some of this $106,445.56.

My plan moving forward is to liquidate mine and wife’s 401k’s and try work out a payment plan with Etrade. I’m also going to ask them to help out in some way…thats a longshot. I will pay them and be back trading….only with set stops this time. What an expensive lesson that was.

I hope my story helps someone else from the same.

J. Lipsky

Hello, I am John, born in Cedar Rapids, but lived a lot of years in Latin America. I am an economist and have specialized in credit and debt. Originally sovereign debt, but later on, in credit score management and debt consolidation. I write for many publications. Here in eCreditDaily, I write about credit, second chance banking, and debt. I also write for other websites and bulletins about inflation and country risk.

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