TransWikia.com

How to bet against IPOs?

Personal Finance & Money Asked by Superbest on February 21, 2021

Suppose one expects that IPOs, on the whole, show poor performance following the IPO (especially if one buys at the IPO), and wishes to bet against them.

This can be done by simply shorting every IPO (assuming someone can be found who will lend the shares), and then covering after 6 months, or for instance setting a limit at -10% and a stop at +20%. But between the borrowing fees and commissions, this does not seem practical for a small trader.

One could also buy puts, or some sort of bearish combination. However for a new stock the liquidity will be poor (for instance PTHN was a month ago and still has only a few dozen open interest). Options are also an advanced instrument so again not very practical.

If one’s outlook is that IPOs generally tend to decline after the IPO, is there an easy way to profit from this thesis?

One Answer

There are 2 primary ways to bet against a stock if you think it will decline. The first is to short sell shares of that stock the second is to buy put options (I would also add that selling naked call options would also be a bet against but I don't believe that is as common as the other 2 mentioned methods).

The problem with short selling an IPO is that you first have to borrow the shares you are going to sell. Since the shares are privately held prior to the IPO that can be problematic. Even after the IPO you may have to wait a bit before shares become available to borrow.

The problem with options (either buying puts or seeking naked calls) is similar. Options are traded on a different exchange than the stock and they have their own requirements that a stock must meet to have options traded.

Both of these problems eventually correct themselves however, not in time for you to catch the initial fall you seem to be looking for.

Answered by homer150mw on February 21, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP