Should You Trade IPO Stocks?

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Today we are going to focus on the strategy that was producing good returns during December. Here are a few things you can focus on when trading IPO related stocks.

IPO

IPO stands for Initial Public Offering; it is the first day the stock will appear on the stock exchange.

For the last 2 weeks we have been trading a few IPOs. This new stock will have its own float (number of shares available to trade), Market Cap, and a lot of people trying to get into a position in this new stock. Because of this initial opening of a new stock, we often see the first day trade green (go up) and it is untradable from the short side.

$WNW

Let’s look at $WNW that hit the stock exchange last week. Tickers that have high volume and low float behave in a similar way.

$WNW IPO started around $7.00, the price right now (12/17/20) is around $75. We want to see how much $WNW gained from the IPO at $7.00. We want the gain to be greater than 1000%. Take the overall market cap and $75 divided by 10 because it went up a factor of 10 times greater than $7.00. The initial market cap of $1.88 Billion divided by 10 is around 188 million in terms of initial market cap. The float on $WNW is under 20 million, making it a “low-float”.

The first day $WNW IPO, there were too many people trying to buy shares so...

There were not any shares available to short.

Because the stock is brand new and it is a “low-float” stock, there is not enough supply for you to barrow shares to short (unless you’re a hedge fund). On the second day, $WNW dropped in the pre-market and was put on “short-sale restriction”. This makes it very hard to short while also setting up a potential bear trap (short trap). The first level of resistance from the pre-market was around $105.

VOLUME

When you are trying to read IPO volume you must look at Volume * Average price.

During normal market conditions it is difficult for a stock to reach $65-85 because it is too expensive for normal investors to buy. In this case, we are using the volume * Average price to calculate how many dollars were being traded on this ticker. Let’s look at a 5-day chart. There is no history on an IPO ticker. On December 17th $WNW traded around $3 million shares. The consolidation was between $120 to $140.

FINAL THOUGHTS

Once you know how many dollars were traded during the day you will know if the volume is sufficient or not in terms of liquidity.

To summarize the 3 points I want to make are:

Focus on risk-reward

The maximum reward is usually around 50-75%. That is all I want to cover today, make sure to leave a question below.

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