Regulation SHO Trade

Entry Logic

• Exact Entry Trigger: A stock is placed on the Regulation SHO (Reg SHO) list due to extended fails-to-deliver.
• Confirmation: The stock has been on the list for several days, indicating a persistent settlement issue.
• Timeframe: Daily chart.
• Location Context: The stock is often in a state of high short interest and is hard to borrow.
• Market Condition: Any.

Exit Logic

• Profit Target(s): A 15-20% gain as the mandatory buy-in period approaches.
• Scaling Out: Sell half at 10%, trail the rest.
• Trailing Stop: A close below the 10-day EMA.
• Signal Failure: The stock is removed from the Reg SHO list without a price increase.
• Opposite Signal: A major dilutive event like a large share offering.
• Time Expiration: The trade's thesis is centered around the mandatory buy-in rules, typically within 13 settlement days.
• Momentum Loss: Price stagnates as the buy-in deadline approaches.

Stop Loss Structure

• Hard Stop: 10% below entry.
• Soft Stop: The stock is removed from the Reg SHO list.
• Maximum Dollar Loss: $1000 per trade.
• Maximum Percent Loss: 10% of the trade value.
• Structural Stop: Below the low of the day the stock was added to the list.

Risk Management Framework

• Risk Per Trade: 0.75% of the account.
• Maximum Daily Loss: Not applicable.
• Maximum Weekly Loss: Not applicable.
• Maximum Drawdown: 15% of the account.
• R:R Requirement: Minimum 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: These stocks are often volatile; adjust size downwards.
• Conviction Sizing: Full size for stocks that have been on the list for more than a week.
• Scaling In: Not recommended.
• Scaling Out: As per exit logic.

Trade Filtering

• Market Conditions to Avoid: Not market-dependent.
• Specific Setups: Focus on stocks where the Reg SHO listing is accompanied by other short squeeze signals (high SI, high CTB).
• Instrument Requirements: Any stock on the Reg SHO list.
• Time Restrictions: The setup has a built-in timer.
• Chop/News Avoidance: Be aware of corporate actions.

Context Framework

• Trend Direction: Any.
• VWAP Relationship: Not a primary factor.
• MA Relationship: Not a primary factor.
• Range Location: Any.
• Higher TF Alignment: Not required.

Trade Management Rules

• Breakeven: Move stop to entry after a 10% gain.
• Scale Out: Take profits into strength near the deadline.
• Add Size: Not recommended.
• Fast vs Slow Moves: The move can be sudden and sharp.

Time Rules

• Optimal Window: Enter a few days after the stock appears on the list.
• Times to Avoid: Chasing the stock on the final day.
• Session Notes: Not session-dependent.

Setup Classification

• A+ Criteria: On Reg SHO list, high short interest, high cost to borrow, and a clear catalyst.
• A Criteria: On Reg SHO list for 5+ days.
• B Criteria: Just appeared on the list.
• C Criteria: Avoid.

Market Selection Criteria

• Instruments: Common stocks.
• Volume/Liquidity: Any.
• Volatility: High.

Statistical Edge Metrics

• Expected Win Rate: 45-55%.
• Average Win Size: 20-30%.
• Average Loss Size: 10%.
• Profit Factor: 2.0+.
• Expectancy: Positive.

Failure Conditions

• Market Conditions: Not the primary cause of failure.
• Specific Scenarios: The fails-to-deliver are cleared through non-market means, or the buy-in does not cause a significant price spike.

Psychological Rules

• Mental Discipline: Understand the regulatory rules and trust the process. This is not a fundamental trade.

Advanced Components

• Market Regime Detection: Not applicable.
• Filters: Cross-reference the Reg SHO list with short interest data.
• Correlation: Not a factor.
• MTF Alignment: Not applicable.

Location

• Where Strongest: In stocks with a genuine and persistent inability for shorts to deliver shares.
• Where Weakest: In stocks where the listing is temporary or due to administrative issues.