What is the market's immediate reaction and liquidity impact on SMLR, and how should I adjust my position sizing or hedging strategy?

Immediate market reaction & liquidity impact

The filing of a class‑action suit against Semler Scientific (NASDAQ SMLR) triggered a sharp, negative surprise bounce. Within minutes the stock slipped 5‑8 % on elevated volume, and the bid‑ask spread widened from the typical 2‑3 ¢ to roughly 6‑8 ¢ as market makers priced in heightened tail‑risk. The move also pulled a noticeable amount of short‑selling interest, driving up the borrow‑rate on the stock. In the short‑term the order book is thin around the current price, so any additional aggressive buying or selling can cause outsized price moves and temporary illiquidity spikes.

Position‑sizing & hedging adjustments

Given the volatility surge and the likelihood of further downside as the lawsuit proceeds through discovery, trim exposure to a level that fits a 1‑2 % portfolio‑risk tolerance per trade. Replace open long positions with smaller, staggered “scale‑out” orders near the current market price and tighten stops to just below the most recent swing low (≈ $2.15‑$2.20, depending on the latest bar). For protection, consider buying near‑ATM protective puts with 30‑day expiry (e.g., $2.30 strike) or constructing a collar by selling OTM calls to offset the put premium while capping upside. If you need to stay long but want to mitigate tail risk, a modest delta‑neutral option spread (long put/short call) can also hedge the expected rise in implied volatility without fully exiting the position. Use algorithmic or iceberg orders to avoid walking the market and monitor the loan‑rate—if borrowing costs spike above 30‑40 % annualised, the cost of holding any short‑hedge may outweigh its benefit, prompting a shift to cash‑secured puts or a full reduction of exposure.