Handling and Profiting From Lockups

Often with a new IPO a certain number of shares are held for company principals, private investors or other related individuals who played a key role in the IPO being put together, accepted and released. These shares are held in what is called a “lockup” state meaning they cannot be traded no matter what the stock is trading for. There is always a set date when the lockup of the shares will end but often it is at least 90 days, and these shares can then be traded, sold or simply held by those individuals who had their shares in the lockup. Sometimes there is more than one lockup with differing end of lockup dates.

Lockups are often difficult for investors to deal with as they create an unknown entity when trading and unknowns often can hurt a trade. An investor recently emailed for assistance with one such trade in FITBIT Inc Stock which has a lockup ending Dec 14. Let’s review his questions and then look for some ideas and suggestions. He sent a number of emails so I have combined them and edited them for brevity.

Investor Questions:

I have 4000 FIT shares at $39 price and as you know they hit us with the additional shares and they’ve been killed lately. I’ve worked about $3.50 off the cost by selling more puts and calls so I’ve been able to reduce my cost basis a little.

I know they have an additional lockup that expires on Dec 14. Can you help me understand what that means and what you’d expect it to mean for the stock price. It’s currently back to $31.25 (Dec 9) but I’m guessing the lockup expiration means more selling which means the price will go down again.

I do expect FIT to be higher after their next earnings release and into the first quarter of 2016, but this information would be a great help in how I sell more puts/calls.

Mainly I’m trying to get an idea of what will happen on Dec 15 when the lockup ends. It would seem the price might go down but as you saw it went up 11% on Friday (Dec 4).

I have 40 covered calls for Dec 18 expiry at $30.50 so I’m not gaining any further gains as the stock goes up so I bought a Dec 18 expiry 31/34 debit call spread on 50 contracts trying to gain some of the profits as it goes up. It’s worth $3,050 now. I was trying to make up a bit more ground by having 50 contracts.

I was thinking of just buying another 4000 shares but I don’t want to do so if we think the stock will get knocked back down after the lockup expiration on Dec 14.

Any help you can offer will be greatly appreciated. Brad

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Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.