The other day, I sat down with Jeff Bishop and Ben Sturgill to talk shop about initial public offerings (IPOs)… I was amazed at the number of IPO stocks there are, as well as, how many trading opportunities they offered (Ben has discovered at least three).
The thing is, I’ve been able to draw some connections with the way I’m currently trading with how IPOs trade.
You see, one of my most profitable strategies — Weekly Windfalls — involves trading options spreads…
When I am bullish I will sell put spreads.
And if I am bearish I will sell call spreads.
Because I’m selling out-of-the-money spreads, I have more than one way to win.
For example, if I’m bearish and sell a call spread, my position will profit the following ways:
Time decay—options are wasting assets
If the stock price drops
If the stock trades range-bound
If the stock price rises but only slightly
Talk about stacking the odds in your favor!
Well, Ben pointed out to me a bearish signal that happens to all IPO stocks…
I’m talking about the lockup period.
Believe it or not, most traders don’t know what a lockup period is…how it affects stocks…let alone how to profit off the event.
You see, when a company goes public, the top shareholders are not allowed to sell their shares. The top dogs have their shares “locked up” for a few months, and won’t be able to sell any of their shares until the lockup period expires.
Once the lockup period hits… there’s a change in the supply and demand, which uncovers an opportunity for a bearish trade… and these lockup periods happen all the time.
Let me put this into perspective, 113 IPOs have hit the market so far this year already… and each one of those newly-issued companies has a lockup period.
That means there’s always a bevy of opportunities you can take advantage of. And I’m going to show you my favorite way to trade them.
Basically, the IPO lockup period restricts insiders who purchased shares before it went public from flooding the market with their shares — for a specified period.
In other words, the company and the underwriters (the investment banks that take the company public) try to keep the supply and demand in check so the IPO doesn’t tank right out of the gate.
Generally, the lockup period ends 3 to 6 months after the IPO’s first trade date.
Think about it like this… company insiders tend to own a large portion of a company’s shares, compared to what’s available for traders like you and me.
I don’t know about you… if I was a company insider who got shares on the cheap, and the company goes public… I’d look to sell once the lockup period ends to cash in.
Simply put, when the lockup period ends, a lot of insiders are looking to sell shares… and that leads to an increased supply…
And you know what happens when there’s more supply than demand… prices plummet.
Let me show you what I mean by that.
Check out this daily chart in ShockWave Medical (SWAV).
This stock was hot… and you could’ve profited multiple times on the way up (the “pop” as Ben would call it).
However… there was another phase that was just as profitable… if not more.
The lockup end-date.
You see, there are some whales out there who know this date is coming up…
… so what do you think they go out an do?
The first thing they would look to do is get into the options because they have defined risk… if there are no options available, their only other choice is to short the stock.
Well, with SWAV, there were no options available and that meant traders had to short the stock for the lockup end-date to take advantage.
SWAV’s lockup period ended on Sept. 3… and as you can see, the stock was plummeting way before that.
And just look at what happened after the lockup period ended…
That said, if you know this date ahead of time and position properly… you could pull in some explosive returns.
However, shorting stock outright is sometimes a bit dangerous… especially if you’re trading a momentum IPO.
So what’s the alternative?
Only look for IPOs that have options in them.
The thing is… there are so many IPOs out there, how can one possibly keep up with all the lockup periods?
You see, Ben knows exactly when these lockup periods end… and he even knows which ones are optionable — that means he does all the grunt work for us.
You’re probably on the edge of your seat thinking… How can I get in on the lockup expiration using options?
Well, all you have to do is look at Ben’s IPO calendar — and you’ll know exactly when these lockup expirations are and how to plan accordingly.
Let me show you how you could play these lockup periods using options.
Options Offer Huge Returns When Lockup Expires
We already know when lockup periods end… stocks typically tank.
Take a look at this chart in Tilray (TLRY) — one of the most epic IPOs.
If you look at the chart above, TLRY’s lockup period expired January 15… and you’ll notice the stock dropped 34% after that date.
TLRY actually had options… so you could’ve bought puts to play the lockup period drop… or you could’ve sold call spreads (one of the strategies I use with Weekly Windfalls).
Basically, when you use a bear call spread, you actually increase your odds of success.
Well, the stock doesn’t actually have to have a massive drop for you to make money. In fact, the stock could rise a little or actually trade in a tight range… all the stock has to do is stay below a level.
With a bear call spread, you’re selling calls with at a lower strike price, while simultaneously buying calls with a higher strike price.
For example, you could’ve sold the $100 calls while simultaneously buying the $105 calls. Typically, the stock would be trading below the strike price of the calls you sold.
When you do that, you receive a credit… and your maximum profit is limited to that. While your max loss is limited to the difference between the strike prices less the credit received.
The breakeven point (encircled in blue) is the strike price of the short calls less the net credit received.
The beauty of using this rather than buying puts outright is the fact that you benefit from time decay. Basically, as time passes… it erodes the value of the options you sold, and you benefit directly from that.
Now, there’s one IPO lockup expiration I want to give you a heads up in… and that’s Beyond Meat (BYND). Shares are expected to flood the market come October 29, so you should plan accordingly if you’re thinking about buying calls or stock.
I say that because it’s so easy to get caught up in the hype and forget about that date… especially when you’re pulling in profits like these.
Sure I’ve been profitable selling put spreads (a bullish bet) in BYND… but when the lockup expiration approaches, I won’t be looking to place bullish bets… and I might look to place some bearish bets on it.
The next time you think about trading a recent IPO, make sure you keep the lockup dates handy… so you don’t get caught on the wrong side as shares are dumping.
If you haven’t done so already, make sure to check out Jeff Bishop’s and my interview with Ben Sturgill for a limited time — and find out how you profit off the three phases of an IPO.