Trading With The Trends Initial Public Offering
By Ultimate Trading
Whats The Correct Way To Trade An Initial Public Offering?
public offering is a part of the market that always generates a
great deal of interest, along with stories of fabulous profits and
spectacular losses. But there are a ways to reliably profit on the
initial public offering. Look for the trends that the initial public
offering may cause and trade with them.
Initial public offering spinoffs are a solid trading trend to work
with. A company that's going to spin off a part of itself as an
initial public offering tends to move steadily up in price until the
initial public offering date, starting a week or two before that
date. On the day the initial public offering starts to trade, the
parent company's stock typically dips sharply. The best strategy is
to buy the parent once it starts moving in anticipation of the
spinoff, sell it the day before the initial public offering is to
begin trading, and then short the parent just after the initial
public offering starts to trade.
Another trend to consider is the quiet period trend. The "quiet
period" for the initial public offering is the twenty five days
after a company goes public. During this time, the SEC forbids the
company and the initial public offering underwriters to say anything
that isn't covered in the company's prospectus or final registration
statement. The underwriters face further restrictions on issuing any
As stocks near the ends of their quiet periods, they tend to
steadily rise in price in anticipation of the "strong buy"
recommendations most will receive from their underwriters after the
quiet period ends. The run-up usually begins about ten days prior to
the quiet period expiration, and is often accompanied by steadily
increasing volume. It's wise to sell quiet period stocks the day
before the recommendations come out. Why not hold the stock after it
gets a "strong buy" recommendation? It's another case of buy the
rumour, sell the news. It's also best to trade this trend with
stocks that have highly respected underwriters and are in hot
Another solid trend play is to short stocks with upcoming initial
public offering lockup expirations. An
offering lockup is a period of time, usually from six to
eighteen months, when insiders who obtained the initial public
offering at the offering price or less cannot sell their shares.
Once this time period has elapsed, insiders often sell their shares.
This trend is shortable because the greater the number of shares
unlocked, the more likely it is that insiders will start to sell
their shares, particularly if the market is not doing well but the
share price is still higher than the initial public offering
starting price. And the more shares freed, the better the chance of
a negative effect on the share price. This trade works best when the
number of shares being unlocked is more than 25% of the current
You should short the stock roughly ten days before the initial
public offering lockup expiration date, since anticipation of the
event usually scares traders out of the stock well before its actual
date. Cover the short about five days after the expiration date. By
that time, most insiders will seem to have sold, and the news will
be priced into the stock.
Like any other trade, this one is not foolproof. Often one of the
underwriters will upgrade the stock as the lockup expiration
approaches, or the company will release news to boost the stock
price to counter-act the selling. Be sure to check company news
closely, since if the market is bad and share prices are down,
lockup periods may be extended.
But when the initial public offering market is hot, a lot of traders
buy into any new company. They commit a trading mistake that's like
placing an overnight market order: They place market orders for an
initial public offering before it starts trading on its first day,
which leads to outrageous run-ups in price right when trading opens.
For the trader, these orders are a sure way to lose money. Your
order will end up being filled at a ridiculously high price that the
stock may never see again.
If you're going to try to trade an initial public offering on its
first day, don't place a pre-opening market order. Don't use market
orders at all. The way to buy is with a limit order after the
stock's price has pulled back a bit and is about to bounce and
continue upward again. The goal is to buy at the bottom of the
bounce, hold it as the price rises, and sell just as the price is
about to fall again. You may be able to do this several times, until
the stock's momentum drops. Remember, you can't short an initial
public offering during its first thirty days on the market.
If you want to hold the initial public offering past its first day,
it's hard to know exactly when to jump in, but wait until after the
initial volatility has ended. The higher the initial public offering
has opened the less chance it has of continuing to climb throughout
the rest of the day. If the initial public offering has opened at an
extremely high price, it will probably sink to a fairly stable level
in an hour or two.
If not, and you think the price could go higher, you might want to
buy fairly soon after the initial volatility has ended. One option
is to buy half your shares and then wait to see whether there's a
slump in the price later in the afternoon when you can buy the rest
for less. The
initial public offering can be incredibly volatile, and like
with any other trade, setting stops is critical. But traded
carefully, they are a consistent way to create trading profits.
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Initial Public Offering