It is time to use the most overhyped IPO of the decade to share a few tips on First Day trading for an IPO. In addition to the tips below I will be broadcasting LIVE starting 5 minutes before FB begins trading and will probably continue to broadcast for another 5 minutes once trading begins.
Everything written below is based on my 16 years of trading experience which has included trading most major technology IPOs. But there is no substitute for observing the price action when it opens and ultimately that will have the largest influence on whether I actively trade FB and how much risk I choose to take.
- The higher FB Opens the more likely it is to present good trading opportunities. This may seem somewhat counterintuitive but a higher opening price is usually a sign of strong after market demand and leads to an additional pop and some good volatility.
- The Offering Price was $38/share.
- Opens between 38-39 probably will suck (check $P and $ZNGA as a reference)
- Opens above 40 decent chance it sees a couple of points of upside (60% chance)
- Opens above 42 good chance we see 3-4 more points of upside (50% chance)
- Opens above 44 may trade up to 50 (30% chance)
- Best case scenario would be it trading up to 56-58 per share. This is highly unlikely but if the momo funds view it as similar to an AMZN which trades based on what they believe it can do in the next 10 years it has a shot. I would put this at less than 10% chance of occurring.
- Don’t trade it first ticks. Yes you risk not catching some type of initial spike but there may be a complete lack of liquidity and no realistic way of gauging or controlling your risk.
- After the initial move look to identify a buyer at a definite price. If you don’t know how to read the tape via Time/Sales and the Level II then use a “tick chart” to track clear support levels that are developing. But frankly if you don’t know how to read the tape you should not be trading this stock anyway for at least the first 30 minutes after it opens
- Once you identify an area where it is being bought look to get long but get flat if the buyer drops. This is the ONLY way to control your risk! This may happen two or three times before it finally trends higher but this is the responsible way to trade an IPO which can drop much further than you might think. (for reference look at the tick chart in LNKD the day it began trading)
- If a buyer drops but within 1 minute it trades back above the support level buy the stock back. If the buyer was done buying they would not rebid at the level they just dropped. This happened in LNKD several times before it traded higher on Day 1
- FB is going to have a float of over 400 million shares so there should be very good liquidity after the first few minutes. But the trade off of having good liquidity is the sacrifice of the outsized moves we saw in LNKD when it had its debut.
- The tightness of consolidations will be a good indicator of its underlying strength and the potential intraday moves it could make. consolidations of under 40 cents would be sufficient for me to buy on a break of consolidation. Consolidations of less than 20 cents would make me more aggressive.
Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is [email protected].
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