It is close to three months since Facebook (NASDAQ:FB) went public, and investors are definitely searching for the dislike button, as the stock performance has been anything but likeable. Thankfully, all public investors have had an option to exit the stock if and when they wanted to, unlike the early buyers who clamored to buy into the Facebook pie before its IPO. And quite a few of them don't have an option to exit until the lock-up period expires.
On August 16, holders of 268 million shares will have an option to exit or keep holding on to Facebook as the first lock-up period expires. Over the course of the next year, more than 1.9 billion shares will be unlocked, adding to the current floating stock. Here is a table that outlines the lock-up period:
Shares Being Unlocked
May 17, 2012
Filing of prospectus
August 16, 2012
Between Oct 15 to November 13, 2012
November 14, 2012
December 14, 2012
May 18, 2012
Is there any way for traders to take advantage of the first wave of the coming stock deluge?
On a one- to two-month time frame, traders can consider buying call options or an outright long position in the stock. I am initiating this position, not on the basis of fundamental valuation or technical analysis, but this is purely a short term trading idea based on market psychology.
Let's delve into this thesis a little further.
The usual thought process will be to short sell Facebook on the understanding that the 268 million shares will add more selling pressure, causing the price to sink further. But we first need to understand who the holders of these 268 million shares are. These are not ordinary guys like you and me. These are sophisticated investors, with an array of tools and financial muscle to create complex positions. Do you think they were sitting still and whining as they watched the stock fall from $38 to $20? The answer is a clear NO.
Their strategies are clear and well defined -- either they want to hold the stock for the long term or get out. And if they want to get out, even when their shares are locked in, all they have to do is call up any of the high profile traders and enter into a forward contract. The high profile trader, sitting in a plush office in a bank, can either hold on to his position and convert it into a prop trader, distribute the risk among other traders, or use instruments like options to hedge it.
Among all investors is a second group that will go by the usual thought process. They believe that the new shares about to hit the market are not already accounted for, and anticipate that the stock price will sink further as the locked-up shares become tradable. To profit from this, they will initiate short positions in the stock, hoping to make a quick buck.
We are the third group, trying to profit from the actions of the other two groups. How smart the holders of the 268 million shares are, and how big a short position the "usual thought process" guys will build. If we have a sizable short build up and there is no price decline due to the new shares, the short covering move could be huge.
The latest available data for short interest in Facebook is 56 million shares, last updated on July 13 by NASDAQ. The next figure, which is due soon, will be the one to watch carefully to see how much of a short buildup has happened since July 13.
As I mentioned earlier, one can either take a position in a call option or initiate a long position. Calls with a strike price of $22 were trading at 1.70, and those with a strike price of $24 were trading at 1.09, as reported by OPRA. Both these options expire on September 22.