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The IPO Warrior Keystone Strategy Guide

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Originally posted on Reddit

The main reason I’m writing this, is because during last week’s BigCommerce IPO, there were a lot of question on how to play the IPO once the stock hit the market, ranging from “When does the stock start trading”, to “How much will it cost when it debuts”, to “Why is the debut price so much higher than the stated IPO price?”…

I made $20k on a $35k trade on BigCommerce (Turned $35k into $55k), and have now played 7 IPOs without a loss, but this was the first one I really nailed. I’m gonna go in depth on what I’ve learned over the past 2 years trading IPOs, and share with you a strategy that I really nailed down in the past few months.

I’m specifically talking about buying an stock on the day of the IPO once the stock starts trading. For most of us who do not have substantial capital in our accounts, or whose brokers don’t get access to many IPOs at the listing price, the best we can do is buy the stock once it is actively trading on the open market (the ‘debut’).

While it sounds pretty straight forward, buying a stock on the day of its IPO is rather tricky, since you don’t know exactly when it will start trading, or at what price it will actually debut on the open market, and since the price often moves very quickly once it starts trading, you want to be able to buy in as soon as possible, especially for a super hot IPO – and there IS a way to get stock the minute it debuts on the market.

To give you an idea of what you can accomplish – in the LMND, NCNO, and BIGC IPOs, you could relatively easily made about 50% on your money on each of these within a day of the IPO.

IMPORTANT TO UNDERSTAND – not every IPO is going to soar, you need to be selective, you need to take precautions to limit your downside, and the goal here is to make the right moves on a stock that DOES take off once it debuts off it’s IPO while not losing money, or at least limiting your losses, when the IPO is a dud.

First, some quick background info to get everyone up to speed, since it does help to prepare you for playing the IPO the day a stock debuts trading:

An IPO (Initial Public Offering) is the process by which a private company, often a startup, initially lists their company’s shares for sale on the public markets. The purpose of this is typically for a company to raise money – they sell shares to the public and use the proceeds from those sold shares to grow their business. Another reason a company will ‘go public’ is so that employees, investors, and owners of the company can realize a capital gain (make money) from the stock they own/have earned as they founded and grew out the company.

Traditionally, a company will hire established Investment Banks to promote their IPO to institutional investors (pension funds, hedge funds, etc), in order to build out a substantial base of buyers who will purchase the shares offered in the IPO. In the weeks leading up to the IPO, the company’s executive team will meet with these investors and pitch their business in order to drum up support for the IPO, and these large investors will ‘subscribe’ to buy a certain number of shares within an expected price range, which is ultimately determined usually the day of the IPO.

The day of the IPO.So going into the day of a major IPO, you know the range of the IPO price and you know the company will list that day, but you don’t know what the debut price will be or when the stock will start trading, and this is your biggest initial challenge.

I’m already assuming the stocks I want to use this strategy for are creating a pretty big buzz in the media and social networks, so my expectation is that they will pop once they start trading. This means that within a few minutes of trading, the stock will already likely have shot up a few dollars or more, so you really want to get in right away.

KEY ENTRY STRATEGY: Set a LIMIT ORDER for a couple of dollars above the Ask Price of the stock, so you are ensured to get shares right when the stock debuts.

You will need to keep an eye on the movement of the Ask price every 5 minutes or so until you see the price start to stabilize – since you don’t know exactly when the stock will start trading, you’re going to need to babysit this for as long as a couple hours: adjusting your Limit Order price according to the Ask price (there are apps that can show you this key info in real time).

For example, the BIGC IPO price was $24, but the debut price started at $70 and then came down to $55 and bounced around a bit. So when the Ask price shows $55, you set your Limit Order for $57; when it goes up to $60, you adjust your Limit Order to $63. If you’re like me, you’re throwing all your available funds at this thing, so you need to adjust the amount of shares you want to purchase in relation to the price change.

You really have to stay on top of this, because the price can swing pretty fast, and you want to optimize the number of shares you get.

For those who don’t understand Limit Orders: a Limit Order (BUY) is basically saying that you agree to pay UP TO $X.XX for the stock.

At some point, the stock will just start trading. There is no real warning, although you can sort of get a feel for it when the swings in price start getting incrementally smaller.

IF you kept your limit price above the Ask price, you SHOULD get bought in almost exactly at the debut price once the stock starts trading. If you managed to do this properly – great, for the type of IPO we’re looking for, you got in at the lowest point possible.

So that covers the first part – getting INTO your trade at the optimal price – for home run IPO debuts, the price typically goes straight up.

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Okay, now I’m gonna stop for a minute and talk minimizing your loss potential for when a stock does NOT go right up off the debut. Not every IPO is gonna explode, and in order to be in position to capitalize on the ones that DO explode, you’re probably gonna have to play a bunch of them that are duds or just don’t rocket right off the launch ramp.

For every LMND and NCNO there’s a RLAY, QH, BLCT, and BLI. Granted, some of these turned out to be potential wins (BLI and RLAY), but not at the level of LMND/NCNO/BIGC – and a couple of them fell pretty significantly right after they IPOd. Even just last week, RXT did a nosedive which would have garnered a 20% loss or worse.

The good news is, that almost all of these stocks experienced a slight bump in the first few minutes after they debuted. If I’m not incredibly confident in a stock, I’m gonna set a Stop Loss either right at my entry point or slightly below it. If it get’s triggered, oh well, either no loss or a small loss, and I just accept that even if the stock recovers, at least I haven’t lost money. The real winners with huge gains are usually obvious from the start.

I’m gonna say this again just to make my point. Set your Stop Loss for whatever amount you feel comfortable losing, and do it right away. It’s okay to lose a little. The home run plays don’t do a big dip right out the gate – they run off pretty much straight from the starting line. You really don’t want to be sweating it out while a stock dittles around the debut price for the day.

One mistake I made with the LMND and NCNO IPOs was raising my Stop Loss amount as the stock popped. Had I simply left my Stop Loss at my entry point, it would not have been triggered at all, but raising it incrementally as the stock price shot up caused it to get triggered on a down swing before the stocks ultimately went far beyond the initial spike.

The anatomy of the stock charts for the home run plays look very similar, particularly in the first 30 minutes of trading. A big jump off the debut price, with an initial spike. BIGC triggered two circuit breakers on the way from $68 to $93 before coming back down to the low $70s before climbing up to $103 the next day. LMND and NCNO followed similar paths. You might consider just selling out a portion or all of your stock on the initial spike, but for the real home run plays, you’ll be leaving money on the table if you sell of the initial spike.

HAVING A GAME PLAN

Just as it’s a good idea to set your Stop Limit to control your acceptable loss, it helps to define your expectations for what you envision as a ‘win’. It’s not easy to time these things to perfection, so if you have some idea as to how much you would be happy to walk away with, you can exit your position if/when your target is reached, and be happy regardless of what the share price does from there.

For BIGC, $100 was my target, and I got out at $100.25. Once it went over $100 I set my stop at $100, and brought it up to $100.50 when it went to $101.00 – I got stopped out as it dropped back down from there.

To clarify that strategy: once your target price is met, instead of just selling at Market Price, set a Limit Order and see if it runs a little, while raising your limit behind the price until you get stopped out. You can also sell out in phases to average out your exit point. While I don’t normally do this, it is a sensible approach.

I find that these stocks typically make a run at the end of the IPO day, and often push higher the next day. While there is no way to predict this for certain, remember that you’re looking for the home run IPOs, and will inevitably play some dud IPOs along the way. The point is to NOT LOSE MONEY on the duds, while maximizing the value of the home runs.

Knowing how to read candle style charts might help you define your exit point as well, but is by no means necessary.

And another note: when you really nail it, you might consider holding onto a few shares of the stock – basically free stock – if you really believe in the company. For example, I bought in for 520 shares of BIGC @$68 and sold 470 shares @$100.25 (+$15,157.50), and kept 50 shares (@$100/share this would be $5,000).

Edit: Since first writing this piece, BIGC has come down considerably, so the shares I held onto are worth a bit less: but they were essentially paid for out of the winnings and I expect this company to be valuable long term.Playing RKT the following day would have netted a pretty big win as well, but I was too amped to focus… something for me to work on as well.

I’ll be trying the same approach with BEKE, XPEV, and CVAC this week, with high hopes for DCT…

Feel free to ask me any questions, play along, or give me further pointers on how I can refine my strategy.

Best of luck!

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