Stocks have given up their early morning gains, as it appears that the market is running out of steam. However, that should be expected, given the rally the market saw the last week.
That said, I believe that the upcoming G-20 meeting (trade talks), and the FOMC announcement (interest rate decision), are going to keep this market on its toes for the next week or two.
But you know what?
It won’t really affect my trading too much. You see, I tend to focus on stocks that have catalysts (or upcoming ones).
For example, I recently returned 100% on a pot stock by the name of Tilray.
(I trade, stocks, options, biotechs, you name it. But if you’re unsure where to start then let me suggest my Sniper Report, Click here to find out more.
If you’ve been reading Kyle’s Trades then you know that I’m not a one-trick pony…instead, I have a basket of strategies that I can go to and try to extract money from these markets.
That said, this trade in TLRY had nothing to do with stock charts and everything to do with stock structure.
If you don’t know already, I like to use catalyst events to get into trades… and take profits ahead of the event.
Now, you might be thinking, “Kyle, why don’t you trade the stock after it has a catalyst?”
Well, sometimes I do… however, the news has to be really good, and it must make sense.
You see, with catalyst events, every trader has a different interpretation of the news.
For example, if a company report earnings… you might be thinking, well… the stock beat its revenue estimates, so it must go up… only to see the stock drop.
That said, if you’re going to trade around catalyst events, you have to make sure you understand the news and are able to take profits quick… because the stock could go down just as fast as it went up.
Tilray (TLRY) Catalyst Trade Case Study
Now, we’re going to do a case study and a quick lesson about stock structure here to get the thought process behind this trade.
Tilray (TLRY) is one of those stocks that could move up and down very fast.
For example, here’s a look at TLRY’s epic short squeeze last year.
The stock had an extremely low float… and around 80% of the company was owned by a private equity firm Privateer
Mechanics of Stock Structure
If you don’t know the mechanics of a stock… it’s pretty simple.
You have your shares outstanding and your floating shares (sometimes just called float).
Now, the shares outstanding simply refers to the total number of shares currently held by all shareholders, and you can find this number on the company’s balance sheet. This is the same number when company’s calculate earnings per share (EPS) when they report earnings.
However, you might think the shares outstanding is the total amount of stock that is available for us to trade…
… well, it’s not.
You see, outstanding shares includes restricted shares held by insiders and company officers, which we can’t trade.
You’re probably wondering, Kyle why is this so important? Don’t we just have to focus on catalysts and patterns?
If you think about it… supply and demand drives a stock’s price… and when there is a low number of shares available to trade, coupled with high demand… what happens with the stock?
It’ll probably spike up.
Floating Shares Explained
This brings us to floating shares, which allows us to identify the actual amount of shares we can trade.
With TLRY specifically, I already knew there was a small number of shares available to trade… just around 5M.
You might think 5M shares sounds like a lot, but when you look at some of these mega-cap companies like Apple Inc. (AAPL), Facebook (FB), and Microsoft (MSFT) – which all have billions of shares outstanding… 5M shares is just a drop in the bucket.
The reason why floating shares matters is the fact that when there is a positive catalyst, the stock could be prime for a short squeeze (just as we saw in TLRY last year).
Basically, a short squeeze occurs when a stock spikes up… and forces short sellers to close their position just simply because they can’t take the pain anymore… in turn, this increases the demand for shares… causing the stock to run up even further.
That’s why knowing the float of a stock is very important.
Now, you can find information about a company’s floating shares and shares outstanding on Finviz, as well as other data providers like Morningstar and Yahoo Finance. Just make sure to double check the information to see whether the numbers are more or less in line.
Now, let’s get back to the TLRY case study.
TLRY News Affects Stock Structure
The other day, TLRY reported that it struck a deal with Privateer Holdings (its majority shareholder) – backed by none other than Peter Thiel – to gradually sell the fund’s stake gradually over the next two years.
Why does that matter?
Well, as we stated earlier, Privateer owns a whopping 75M shares (77% of the company)… and it only has 5M shares floating.
So if Privateer were to actually sell those shares… it would flood the market, causing excess supply, potentially causing shares to drop.
Now, short sellers have been betting that Privateer would actually bet it would flood the market, with over 20% of the shares short… that news was actually really good… because the shorts were wrong.
Here’s what happened with the stock after it announced the deal.
Now, I actually trade TLRY options because the risk-reward there was a lot better in my opinion… and of course, I alerted clients about the trade.
Just an hour later… here’s that options trade turned into a +120% winner.
(If you want to receive option alerts like these in real-time, as well as access to my portfolio, and options video lessons… click here to find out more)
Now, I actually sold all of my options before the close on the day that news came out… because I knew TLRY could easily pull back.
As you can see, if you understand the catalyst and how it affects the company itself… you can uncover opportunities like the one I found in TLRY…
…however, if you don’t know where to start when you’re trying to find winning trades… I have a simple and easy-to-follow approach to options trading, what I call I.G.N.I.T.E… if you want to learn more about it, click here to get started.
Now, if quick trades aren’t your think, and you’re just looking to invest in a handful of stocks… receive stock picks, the thought process behind the trades, and so much more… click here to find out more.