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MrTopStep gives futures traders a view from within. From the floor of the CME to trading screens, experienced professional traders offer their observations, insight and knowledge to help you improve your mastery of the markets.
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  • Trading Primer: After The Lock-up - LNKD 7 comments
    Nov 21, 2011 2:22 AM | about stocks: LNKD
    A lock-up is a contractual agreement that precludes majority shareholders and company insiders from trading their shares for a certain period of time after a company has initially gone public, generally between 90 to 180 days.

    A lock-up is done on IPO's so that the market is not flooded with a new supply of a company's stock too quickly.  Typically 20% of the shares are offered to the public with 80% being held by institutional investors and company insiders.

    That got me to thinking what would happen to price AFTER the lock-up expires and everyone is free to dispose of shares in the open market - and I discovered there is empirical data suggesting there is a permanent drop in price of 1-3% post lock-up.


    If this statement proves true, then LNKD is offering a great opportunity for an event based short entry. Let's take a look at the chart.



    LNKD had an IPO high of $122.70 and a recent low of $60.14.  Since August, the price has been rangebound between $67.00 & $92.00.  When a price stays rangebound for a long time, it is considered a "channel stock".  Channel stocks are great for options writers as you can sell calls at the top and puts at the bottom with defined risk and entries.  When price starts to move above or below the range it can lead to a breakout.  Remember that the word breakout does not indicate direction, only that price moves with conviction up or down.


    We've discussed that the bollinger band complex contains 90% of all prices.  Looking at this chart, we don't have a deviance, but we do have a telling indicator by studying the band formation.  See how the top bollinger band is relatively flat but the bottom one is sloping down?  That's a pretty reliable signal that price is going to resolve to the downside.

    Combining the known information, we now have a chart pattern giving indication price will resolve to the downside, and a catalyst to help get it started.  That's a winning combination.

    What's the trade?  I like the December $70 puts for $5.60 or less and/or the December $67.50 puts for $5.00 or less.  I assign a first downside target of $60 based on the current known low of $60.14.  Based on this the theoretical value of the $70 put is around $10 and the theoretical value of the $67.50 is $7.75.  The theoretical value is assuming price hits target no later than the Monday before expiry.

    Shorting the end of the post IPO lock-up can be a profitable trade tactic, especially when the chart is already showing price weakness.  I am long the December $70 and December $67.50 puts.

    Suz
    Suzie@OptionMarketMentor.com
    @suzyq76022

     

    Stocks: LNKD
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Comments (7)
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  • rainlily
    , contributor
    Comment (1) | Send Message
     
    Suzie: no problem with the trade. But the lockup period expired Nov 15 according to EDGAR. http://bit.ly/sLxJRA And the secondary was filed last week, priced on Nov 16 in the evening and already sold. Even better trade if you had done it last week when the lockup really expired.
    21 Nov 2011, 10:55 AM Reply Like
  • mrtopstep
    , contributor
    Comments (9) | Send Message
     
    Author’s reply » Thanks so much for the correction! I was indeed reading bad information :) Good thing the market cooperated with me today. This just goes to show why I don't take one single item and rely on it solely for an actionable trade. No matter the news if the technical's don't support it then there is no trade. Suz
    21 Nov 2011, 10:39 PM Reply Like
  • sf_director
    , contributor
    Comments (5) | Send Message
     
    The lock-up expired on Nov 20. This revised date is on the Company's recent S-1. See "lock-up agreements" at http://1.usa.gov/sOFhTf The period was extended past the original date reported because the lock-up can be extended17 days after an earnings report (Nov 3). Watch for the same thing to happen in February when the lock-up for the follow-on expires. Discl: Short LNKD
    22 Nov 2011, 07:40 AM Reply Like
  • mrtopstep
    , contributor
    Comments (9) | Send Message
     
    Author’s reply » Hi there, this has been addressed in the comment above yours...thanks for the shout out though!!
    22 Nov 2011, 10:06 AM Reply Like
  • sf_director
    , contributor
    Comments (5) | Send Message
     
    No problem, but the comment above mine said the IPO lock-up expired Nov 16, I'm saying it expired Nov 20. So the date in your article was correct.The same thing is going to happen to the SPO lock-up in February, the date will be extended due to the earnings report.
    22 Nov 2011, 05:28 PM Reply Like
  • mrtopstep
    , contributor
    Comments (9) | Send Message
     
    Author’s reply » It's sure taking its' sweet time in dropping, but I believe it will be a very successful trade. I remain short but now only with the Dec 67.50 puts. I closed the Dec 70's today for nice gains :)
    23 Nov 2011, 08:49 PM Reply Like
  • sf_director
    , contributor
    Comments (5) | Send Message
     
    Nice gain. The underwriters have a 1.2 m greenshoe but they will run out of ammunition eventually.
    27 Nov 2011, 04:37 AM Reply Like
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