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(Options) Part 1: The Simple Basics of Stock Options Trading - Trading with the Trends - IPOs
By David Jenyns
IPOs are the simple basics of stock options trading and 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
IPOs. Look for the trends that they cause and trade with them.
IPO spinoffs are a solid basics of stock options trading trends to work with.
A company that's going to spin off a part of itself as an IPO tends to move
steadily up in price until the IPO date, starting a week or two before that
date. On the day the IPO starts to trade, the parent company's stock options
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 IPO is to
begin trading, and then short the parent just after the IPO starts to trade.
Another basics of stock options trading trend to consider is the 'quiet
period' trend. The 'quiet period' for IPOs is the twenty-five days after a
company goes public. During this time, the SEC forbids the company and the IPO's
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 research.
Another basics of stock options trading tip is that 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 options after it gets a 'strong buy' recommendation?
It's another case of buy the rumor, sell the news. It's also best to trade this
trend with stocks that have highly respected underwriters and are in hot
sectors.
Another basics of stock options trading play is to short stocks with upcoming
IPO lockup expirations. An IPO lockup is a period of time, usually from six to
eighteen months, when insiders who obtained the IPO 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 IPO offering 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 market
capitalization.
You should short the stock options roughly ten days before the IPO lockup
expiration date, since anticipation of the event usually scares traders out of
the stock options 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 options.
Like any other trade, these basics of stock options trading tips are not
foolproof. Often one of the underwriters will upgrade the stock options as the
lockup expiration approaches, or the company will release news to boost the
stock options 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 IPO 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 IPO 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 options may never see
again.
If you're going to try to trade an IPO 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 IPO during its first thirty days on the market.
If you want to hold the IPO 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 IPO has opened the less chance it has of continuing to climb
throughout the rest of the day. If the IPO 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. IPOs can be incredibly volatile, and like with any
other trade, setting stops is critical. But, traded carefully, these basics of
stock options trading tips are a consistent way to create trading profits. About the Author -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- David Jenyns is recognized as the leading expert when it comes to designing profitable options trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Options Trading Systems course.
Click Here To Download ==> Options Trading Systems http://www.ultimate-trading-systems.com/options.html -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
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