Successful retail traders usually have many “tools in their toolbox”. Market conditions and the nature of opportunities change over time, so a trader can’t rely on just one or two approaches. Some of these tools are used to determine how you will take advantage of an opportunity, structure trades, hedge, manage money, etc. Some tools use stock, options, and futures in various combinations to structure the desired return vs. risk profile. Other tools are used to actually find opportunities….one of which we will discuss today.
The IPO Lock Up Opportunity
The IPO Lock Up opportunity presents when a company goes public, company insiders, employees and early investors are restricted from selling their shares, usually for a period of up to 180 days. This restriction prevents these shareholders from flooding the market with shares, depressing the stock price. When the lock up period expires, the restricted shareholders can’t wait to cash can in and now sell their shares setting up a situation where the stock price could be under considerable pressure. We are usually looking for situations to buy puts where an IPO’s price has increased in significantly, the percentage of restricted shares relative to outstanding shares is high and there are 4 to 8 weeks to the lock up expiration.
What’s interesting about an IPO Lock Up opportunity is that it is not based on the analysis of a subjective chart pattern like support/resistance lines or other “customer indicators” but is based on the real determinator of price….supply and demand. It is a trade you can find and research on your own based on publicly available information (but it will take some work).
Outlined below are a few ways to take advantage of this opportunity.
GLBE went public on May 12, 2021 with a lock up period expiring on November 8, 2021. There are 142,000,000 million shares outstanding but only 15,000,000 shares were issued and trading. So at the time of the IPO, almost 90% of the shares were “locked up” and couldn’t be traded until the November 8th expiration. The IPO price was $25.00; on October 6th the stock was trading at $66.75 – an increase of 267%. After the lock up expires, all the restricted shares can be traded and you can bet those restricted shareholders want to cash in….so what do you expect is going to happen to the stock price with that selling pressure? So the opportunity is to take advantage of this potential huge potential supply and buy puts expiring after the lock up. In addition, earnings are coming up around the same time increasing the potential for volatility.
Let’s take a look at PLTR. PLTR went public in in September 2020 at a price of $7.25 with about 80% of the shares locked up. The lock up period expired in February 2021. PLTR hit high of about $45 in January 2021 and then dropped almost 50% by the lock up expiration date.
Here’s a completely different way to trade a lock-up. This approach does not take advantage of the stock moving lower as the restricted shares come to market but takes advantage of a potential bounce in the stock after the lock up period has passed and the impact of the locked up shares as been realized.
LCID went public in late February with a lock up period expiring in September. In the week’s before the lock up expiration, the stock fell around 30% in anticipation of the locked up shares coming to market. In this case, we did not take advantage of the lock-up expiration trade described for GLBE, but instead waited for the effect of the released locked up shares and then looked for an opportunity to get long. Our signal to get long in early September was based on two Masters In Trading tools. The first, the High Value Target Tool, indicated the stock was extended to the downside and buy signal was issued:
The second, the Wall Street Wiretapper, indicated unusual option activity in LCID in late August and early September:
LCID rallied over 35% in the next 3 weeks.
Interested in learning more…..try your own analysis on BYND…..where the stock dropped over 30% leading up to the lock up expiration.
Do you want to evaluate an upcoming opportunity….check out CFLT, TASK, S, DOCS, DLO or FIGS and see if you think they are strong candidates for an IPO Lock Up trade!
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