Lessons Learned: Surviving a Direct Offering

In the world of volatile COVID-19 and penny stocks, there’s always some obscure company (or a once-strong company that’s now buried in the ashes) that suddenly finds life and starts trending.

It might run fast and furious, or it might climb over the course of a few days. After a while, you get used to the trend and start to believe in it. The waters are smooth and you’re sailing to highs. The only thing you may be worried about is short sellers raiding it and periodically driving the price down. But for those situations, there’s always SSR* for some respite.

But sometimes your worst enemy isn’t the short-selling bears. It’s the very company whose stock you’ve bought. Say hello to the “Direct Offering at the market price.”

Generally speaking, a direct offering isn’t a bad thing. BUT, you can always expect one thing to happen when a direct offering happens. The stock will tank or lose significant value, and very quickly because folks are unloading it in a panic. If you look closely at the Direct Offering details, it may state the price that it’s being offered it. Whatever that number is, expect the stock price to end up at or closer to that value.

Eventually, when the paperwork to announce its completion is filed with the SEC (if I recall correctly, it’s called an 8-K?), you will again see a slight bounce, but there is NO GUARANTEE that it will come back to the pre-offering price unless there is some positive PR or news about the company.

It’s happened to me at least four times, and each time I learned a different lesson. Here are two specific examples:

  • TOPS issued a direct offering while I held it at about $0.59 and it went down to the $0.20s. I panic sold and lost a lot of money
  • XSPA issued a direct offering while the stock was trading at $0.32. I had a buy limit order for $0.28, which was the lowest price it had hit earlier in the day. The price went down to $0.22. I’m holding it, and shortly after it has rebounded to about $0.27. I may not break-even, but I didn’t make a bad situation worse by panic selling at the bottom. My losses will at least be small.

Keep reading on for the lessons I’ve learned. And as you read these lessons, keep in mind that some of these can also help avoid or minimize losses from a short-seller raid.

Note: This is not a recommendation to buy or sell stocks or any promise of gains

Lesson Learned 1: The Stop Loss

If you own this stock, it’s always a good idea to have a Stop Loss order set up. You can either set this up when purchasing the stock or afterwards, and it can be paired with a Take Profit Order. This way, when the stock begin to crash past a certain point, your shares will be sold without incurring too much loss.

Here is a link to a helpful video on various Order Types on Webull.

But here’s the catch: Stop Loss orders and Take Profit orders only work during regular trading hours, so if the stock you’re holding has a direct offering announced after hours, only a Stop-Limit Order will work. Unfortunately, if you have that set, then you need to manually modify or cancel it when the stock reaches a desired high and you wish to cash it in for profit.

Lesson Learned 2: Beware setting a Buy Limit Order and leaving it unattended

What do I mean here? Let’s say you don’t hold any shares of this stock, but are looking to buy some when there’s a dip. Unless you intend to sit there staring at the screen all day or feverishly checking every few minutes, you are likely to set a Buy Limit order so that the shares are automatically purchased when it hits that price or lower.

Usually, that would work well. BUT, if the price drop is happening because a direct offering was announced and you’re not watching, you’ll catch the knife as it’s dropping. You’ll get the shares and instantly be in a loss situation.

It’s a good idea to have a Stop Loss Order added to your Buy Limit Order so that the stock purchased could also be sold if it drops past a certain price point. You will incur a loss, but likely a MUCH smaller loss than if you had no protection.

An alternative could be to set an alert instead of a Buy Limit Order so that when the stock falls below a certain price point, you get alerted on your computer, phone or watch and then you can take over, understand the situation and determine if/when you should buy. Webull alerts only work during regular trading hours, while Moomoo alerts work in extended hours too. You will have to be quick to react on those alerts since the price is moving quickly when a direct offering is announced.

Lesson Learned 3: Don’t Panic Sell!

When a position has already lost a ton of value and the stock price is close to the direct offering price (let’s say it’s dropped from $2 to $0.50 and the direct offering is priced at $0.45), I have learned that it’s best to let it hit that bottom and then wait for the bounce-back. Often times, it may bounce back to $0.60 or $0.70 at least for a short period, which is better than selling anywhere between $0.45 and $0.50.

Generally speaking, unless I’m panic selling at the first instance of bad news and before the stock has lost significant value, it’s typically always magnified my losses.

Lesson Learned 4: One man’s trash is another man’s gold

This is in case you don’t already own this stock. If you have good reason to trust that the stock has potential, buy it while it’s or near the bottom. It will often have a bounce fairly quickly after the sell-off. That bounce won’t bring it back to pre-offering value but it could be a great scalp if you have a day trade available, or if it happens late in the day and you wish to hold it overnight to sell in the Pre-Market session.

My Thoughts on Doubling Down Your Position (or Averaging Down your position):

I’ve seen some folks double down on a stock when it tumbles, especially if they believe it will climb back. Folks do it because it lowers their price per share and allows them to break even at a much lower price point when the stock does rebound.

It could work, and I have done it on occasion, but it is a risky strategy. Why?

Well, first, depending on your original position and your current buying power, purchasing more shares of this stock means that you’re locking up more buying power into an already bad trade.

Often, to see a meaningful impact, people buy up almost as many shares as they already have so that it literally splits the difference between the current price and the price they originally bought it at.

If that stock comes back up, great. If it keeps going down, now each cent or dollar that it goes down, your loss multiplies and becomes even larger.

While you wait for that stock to rebound, the money you’ve used for the additional shares is locked in and cannot be used to trade other stocks. That’s money you could have been spending on a more profitable trade.


Be careful: In any of the scenarios above, if you bought the stock today and do not have any day trades left, DO NOT set a Stop Loss / Sell Limit Order. If it executes that same day, it will restrict your ability to day trade at all, because your broker will mark you as a Pattern Day Trader (PDT) AND issue an EM call (i.e., an Equity Maintenance call, where you are required to deposit enough funds to bring your account up to $25,000). If you’re a repeat offender, your account could be suspended.

*Don’t know what SSR is? It’s a short sale circuit breaker than kicks in when a stock is shorted significantly, and falls 10% or lower than the prior day’s closing price. This prevents shorting of the stock for the following business day)

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