When it comes to trying to make money in the stock market, I don’t mess around. For example, It’s not uncommon to casually throw on options positions that have several hundred contracts.
However, I’m not gambling here… I’m waiting for my money pattern to show up before getting on the offensive…
And the results have been nothing short of phenomenal recently…
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That said, I prefer options because they offer incredible leverage… and you as you can see from the profits above… they pay well too.
People often ask me why I follow the Fed and interest rates so much… it’s because that’s where the money is at. In addition, I’m watching the VIX and the economic calendar for any upcoming catalysts.
But you know what?
Very few things have been hotter than the IPO market this year. However, unless I’m getting in Pre-IPO, I’m not touching these stocks until they become optionable.
Trading options on recent IPOs can be very lucrative.
Because there is very little price discovery. For example, how do we really know how volatile a stock is going to be after just a few weeks of trading? In other words, there is some educated guesswork involved when the market makers price options on this recent IPOs.
But here’s the thing… When I’m playing options on them… I’m not guessing.
(I stay away from trading IPOs on their first day, however, it’s time to dance when they become optionable… if you want real-time alerts on recent IPOs, click here to get started)
That said, I’d like to share with you more about what the IPO process is all about. And then tell you how I was able to profit off two recent IPO option trades in Beyond Meat, ride-hailing app, Lyft.
You’ve probably heard of the term initial public offering (IPO) before… and how people make a ton of money on those trades. However, just because a stock is conducting its IPO… it doesn’t magically mean you’ll make money. Not only that, it’s often hard to get shares at the IPO price.
Now, there’s not much of an edge for me to trade IPOs on the first day… in fact, since we’re not working at a bank or large investment bank… we’re at a disadvantage. That’s why I like to wait until the options on the stock started trading… I know that’s where I could make money because I have a clear edge.
Before I go over how I trade options on recent IPOs… you need to understand what an IPO actually is.
Initial Public Offering (IPO) Explained
An IPO is simply the very first time a stock issued by a company is offered to the public. In other words, people are able to buy and sell shares of the stock once it IPOs. Prior to that, these companies are considered private and only have exclusive shareholders. For example, prior to an IPO, the main investors in the company typically include founders, insiders, families and friends. Additionally, venture capitalists (also known as angel investors), hedge funds, and other investment managers may be invested in the company.
However, there’s only so much money they could raise with just a handful of investors… if a company really wants to grow exponentially, they’ll need to offer shares (or a piece of the company) to the public.
Now, once a company goes through all the IPO process – the excitement starts to begin because traders are now able to invest in companies like Uber Technologies (UBER), LYFT Inc. (LYFT), Pinterest (PINS) and Beyond Meat (BYND)… that’s when you typically see companies up 20%+ in a day.
Well, the reason for the large percentage gain is due to demand for the stock… not only that, the percentage gain is based on the offering price, which is a lot different where the stock trades at on its IPO day.
You see, there’s an offering price.
IPO Offering Price Explained
The offering price is the price at which the underwriter (the investment bank leading the IPO) allocates shares for the IPO to other banks, funds, or brokerages. Now, the shares are priced based on the underwriter’s analysis of the company from a valuation standpoint… as well as the demand for those shares. Typically, the offering price is set the day before the company is supposed to IPO.
Once those shares are allocated at the offering price, the banks or brokerage firms offer those shares to their best customers (it’s really hard to get into that group).
Thereafter, those who bought those shares, as well as the underwriter, will offer shares on the IPO date… and finally, we’re able to trade that stock if we wanted to.
Unless I can get the offering price, chances are I’m not going to trade an IPO on its issue date… because I don’t have an edge, but those who own it at the issue price has an edge over us (they own the stock at a much lower price).
Now, if there’s enough demand for the stock… the stock should run higher and gap up the next. However, that’s not always the case… and beginners will try to buy an IPO at the opening price (the price of the first trade) to try to take advantage of the gap up… only to wake up to them losing money.
You Don’t Always Make Money When You Buy IPOs
For example, LYFT was supposed to be a tech unicorn and one of the hottest IPOs of the year… if you had bought at the opening price and held on… well, you’d be in a world of pain right now.
LYFT offered its shares for $72 (the offering price), but since there was so much demand for the stock… it opened at $87.24 (the first price is was traded by the public).
Here’s a look at LYFT’s performance since its IPO.
With IPOs, unless you have a clear edge… you should probably stay away because you could be a bag holder shortly after.
Trading Options on Recent IPOs Works Well
Now, you might be wondering, “Jeff, what happens if I want to trade the stock?”
Well, you can wait to trade the options.
In order for an IPO to be listed, the stock must trade on the Nasdaq, NYSE, or AMEX. Not only that, it needs to meet certain requirements like having at least 2,000 shareholders and 7M publicly-held shares outstanding. Not only that, IPO stocks can’t have options traded on them until 5 trading days after the IPO date.
However, once the options start trading… I start looking and using my trading approach to figure out when to buy calls, sell puts, or buying puts.
For example, I was actually patiently waiting to trade LYFT. I actually didn’t touch the stock or options until weeks after the IPO date.
I waited for my money pattern to show up, and I sent this out to Weekly Money Multiplier clients:
So I sold $50 puts in LYFT because I thought LYFT wasn’t going to get below $50 at the time… that means all LYFT needed to do was stay above $50… and I’d have a 100% winner. However, since IPOs can be very volatile, you have to know when to take profits (you can read more about my options trade in LYFT).
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If you haven’t heard yet, Beyond Meat (BYND) has been a really hot IPO – shadowing UBER and LYFT.
Now, you actually could’ve used the money pattern to trade BYND options.
For example, if you look at the hourly chart on BYND… you can clearly see where you could’ve bought calls.
Notice the stock hit a high of $85.45 shortly after its IPO date… thereafter, it pulled in near the $60 level (which is a support level). That support level held, and BYND just start to ramp higher. Now, if you were watching this chart, you could’ve actually bought call options on BYND once the blue line crossed above the red line.
Now, I didn’t take that trade because there was so much volatility in the market, and I was trying to keep a balanced portfolio… another long trade and I would’ve been more exposed to dips in the market.
I actually waited for the market to catch a bid before I bought calls in BYND… the trade was short and quick, and with just a small move in the stock, I was able to lock $4K on the trade.
Had I bought the stock, I would’ve had to put down over $170K just to buy a little less than 2K shares to generate that same profit.
You see, with options, it provides you with leverage… and when you buy calls, your risk is defined… that’s why I like to trade options on recent IPOs, rather than buying the stock outright. I don’t need to have a large capital outlay and I have a clear edge with options.
Lastly, if you’d like to hear about my latest comments on IPOs and crypto’s here is a clip from Yahoo Finance.
Highlight: “I don’t think right now is a good time to start in crypto, but I think it’s back on the radar again,” @RagingBull co-Founder Jeff Bishop says. “I think now’s an opportunity. … If bitcoin comes back with that $5,000 mark, that’s probably a great opportunity.” pic.twitter.com/uypzpHFP1q
— Yahoo Finance (@YahooFinance) May 20, 2019