Investing in Unlock Dates: Wall Street's Dirty Little Secret
By Ian L. Cooper
Having received an unlock date-related question the other day, I wanted to answer it here in case more of you had similar questions. Asks Mark J., “Ian, I’m interested in playing the unlock dates you’ve mentioned. Is there a list of company unlock dates I can take a look at? And why are share unlocks bearish?”
Thanks for the question, Mark. Let’s start with why unlocks can be bearish.
When any company goes public, only a percentage of the company's stock is offered for sale, also known as the float. The rest is held and owned by underwriters, company officers, and other insiders. By contractual obligation, insiders and underwriters can't sell their stock for a period of time... usually six months to a year from the date of the IPO. This is commonly referred to as the lockup period and it’s set up to ensure that insiders cannot profit from the early trading frenzy generated by an IPO. It provides stability because insiders cannot simply dump their shares. Once the lockup period expires, anything goes, and insiders are allowed to sell their shares.
If an insider has realized a significant gain on his investment, he may cash out. And in many cases, insiders cash in and flood the market with shares, forcing the stock price lower. Ordinary shareholders, unfamiliar with the unlock practice, are completely baffled. Share prices are dropping like a cement boot in the East River and they don't know why. Lucky for us, they panic and dump their shares at a loss, only adding to the glut and our profit opportunities.
However, not all unlocks are suitable for trading. Say for example, stock ABC is unlocking five million shares, but has a float of 30 million shares. The unlock of five million shares isn’t likely to negatively impact share price much. However, if said company had a float of five million and was unlocking 30 million shares, and had a toppy chart, odds are often good that the stock stands a chance at pulling back.
As for upcoming companies with unlock dates to watch, here a few to keep on radar:
6/6/07 – Heely’s Inc is unlocking 6.425 million shares.
6/13/07 – Cal Dive International Inc is unlocking 22.1 million shares.
6/13/07 – Newstar Financial is unlocking 12 million shares.
6/18/07 – Claymont Steel Holdings Inc is unlocking 8.7 million shares.
6/18/07 – Melco PBL Entertainment is unlocking 60.25 million shares.
6/18/07 – Trina Solar is unlocking 5.3 million shares.
6/19/07 – Universal Power Group Inc is unlocking 3 million shares.
We use unlock dates as a bearish tool in Death Cross Trader.
Again, thanks for the question Mark. If any one has any further questions, please always feel free to e-mail me at icooper@taipangroup.com. Per SEC rules, I can’t respond to or answer personal investing advice, but I can always answer it in a public forum such as this.
Always happy to help,
Ian L. Cooper, Editor, Death Cross Trader
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