Overview: A profitable IPO trading strategy

One of our most profitable IPO trading strategies – the one that we have been highlighting on our premium service in recent months – is shorting recent IPOs that meet certain criteria in the two weeks prior to their IPO lockup expirations.

Why? Readers who regularly follow these recommendations are likely familiar with the strategy, but here’s a quick recap. When companies go public, company insiders and pre-IPO shareholders are subject to certain restrictions concerning shares that they own. These insiders and pre-IPO shareholders own stock that is subject to a 180 day “lockup period.” When the IPO lockup period expired on the 180th day, these shareholders – who generally own sizable stakes in the company – are finally allowed to unload their shares, take their profits, invest in other ventures, etc.

The opportunity? When all of these previously restricted shares are finally freely tradable, these pre-IPO insiders and shareholders are often eager to unload their positions – and they often do it at the earliest possibility on the 180th day. Because these holdings are often sizable, the marketplace can end up being flooded with these newly-tradable shares, and the stock price can take a sharp, sudden, downward turn as a result.

When the strategy works best

Over the six years that we have been implementing the IPO lockup investment strategy, we have found that the lockup shorts that have worked best generally have a few things in common:

1. There are a large number of pre-IPO shareholders, venture capital firms and insiders who hold sizable positions. Many of these investors and funds have had their money tied up in these IPO periods for some time and are eager to invest in the latest deal or reallocate funds to another investment or project.

2. Tech companies that do not have secondaries during the lockup period.

3. IPOs that have performed well during the lockup period. Often, restricted shareholders are even more eager to take money off the table and sell their shares when they’ve been raking in huge profits during the IPO process.