Electro Optic Systems Holdings Ltd (ASX: EOS) shares fell around 16% yesterday after the company revealed that senior executives had exercised their share options and signalled plans to sell some of their shares.
For a company with a share price that has risen 7 times over the past year, the reaction was sharp, but not entirely unexpected.
Whilst EOS shares have rebounded today, the pattern will look familiar to investors. DroneShield Ltd (ASX: DRO) followed a similar path, starting off with a powerful geopolitical tailwind, a rapid rise in the share price, and then volatility as insiders began to sell.
So what can investors learn from this?
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The work happens before the rally
Before their share prices surged, both EOS and DroneShield had significant periods of underperformance. EOS shares, for example, were down 70% from March 2021 to May 2025.
At some point, there was an inflection point, and the fortunes of these companies changed. This highlights the importance of constantly turning over ideas, understanding what a company does, and critically assessing what could go right and what could go wrong as the market environment evolves.
The stock market is dynamic, and it can throw up opportunities from unexpected places. Spotting those opportunities when they emerge requires you to put in the work before it's obvious who the winners are.
You need a risk management plan
Most investors spend time thinking about what to buy, but far fewer think about how to manage a position as it evolves.
Risk management takes different forms, but it starts with position sizing. If you bought EOS or Droneshield shares, was it 5% of your portfolio or a 10% position? Whatever it is, that decision matters more than most people realise, especially with volatile small caps.
But it doesn't stop there.
What happens if that position performs exceptionally well? A 10% position can quickly become a much larger part of your portfolio. That's a great problem to have, but at that point, the question shifts from "Is this a good investment?" to "Is this too much allocation to one idea?"
Some investors decide to sell a portion and trim along the way. Others rebalance back to a target weight, e.g. back to 10%. And others simply do nothing and let it ride.
There's no single right approach; it depends on your assessment of the company's prospects, plus your own objectives, time horizon, and risk tolerance.
The key is having a plan before you need it.
Because when a stock is moving quickly (up or down), decisions made in the emotion-fueled moment are rarely the best ones.
Expect insider selling
Naturally, investors will want management to stay invested all the way through, but that's not what typically happens.
At EOS, management exercised options at prices as low as 50 cents, with the stock recently trading around $10. With millions of dollars on the table, most people in that situation would likely choose to sell a portion of their stake, perhaps to buy a house (or a better house!).
Investors may prefer management to stay fully invested, but in reality, selling is what usually happens.
You should expect it and the volatility that comes along with it, then position accordingly.
Fundamentals and valuation still matter
A falling share price doesn't automatically mean the business is weakening, but also a growing business doesn't automatically mean it's a better investment idea.
It's entirely possible for a company's fundamentals to improve meaningfully (for example, doubling the expected value of its future cash flows) while the share price rises by 10x.
In that case, the business is stronger, but the investment opportunity may actually be less attractive.
That's the distinction investors need to make, but admittedly, it's easier said than done.
Foolish bottom line
Stocks like EOS and DroneShield can deliver exceptional returns, but those returns come with volatility. The advantage comes from doing the work early, managing risk as the position evolves, and understanding that price and value don't always move in lockstep.
