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Puts don't start trading immediately after the IPO. (There are also lockout/reporting requirements on derivatives, but I've always wondered how enforceable/det

Puts don't start trading immediately after the IPO. (There are also lockout/reporting requirements on derivatives, but I've always wondered how enforceable/detectable such transactions are.)

staunch 15y ago
There are ways to hedge though, right?
- jpdoctor 15y ago
  Not usually, you need someone on the other side of the transaction. And even if the options were available, the volatility would make the spread very costly.
  - lancewiggs 15y ago
    The standard way, if you are prohibited from trading that stock, is to buy derivatives that are short on a basket of similar stocks. This hedges against a general market fall, such as 2001.
- nikcub 15y ago
  yes, any good broker can set you up with a collar. you miss the upside but it will keep your price locked in until the lockout period expires. A lot of people do that. If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.
jamiequint 15y ago
I just remember there being a famous story of Mark Cuban buying out of the money puts on Yahoo stock after the acquisition of Broadcast.com. Obviously a different scenario, but always reminded of this whenever IPO lockup talk comes up.
- secretasiandan 15y ago
  Cuban used a synthetic hedge. "After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had." http://www.fastcompany.com/magazine/63/fasttalk.html http://www.fastcompany.com/magazine/63/fasttalk.html So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.
  - blacksmythe 15y ago
    >> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk. True, although at that time those two were highly correlated.

Puts don't start trading immediately after the IPO. (There are also lockout/reporting requirements on derivatives, but I've always wondered how enforceable/detectable such transactions are.)

staunch 15y ago

There are ways to hedge though, right?

jpdoctor 15y ago
Not usually, you need someone on the other side of the transaction. And even if the options were available, the volatility would make the spread very costly.
- lancewiggs 15y ago
  The standard way, if you are prohibited from trading that stock, is to buy derivatives that are short on a basket of similar stocks. This hedges against a general market fall, such as 2001.
nikcub 15y ago
yes, any good broker can set you up with a collar. you miss the upside but it will keep your price locked in until the lockout period expires. A lot of people do that. If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.

jamiequint 15y ago

I just remember there being a famous story of Mark Cuban buying out of the money puts on Yahoo stock after the acquisition of Broadcast.com. Obviously a different scenario, but always reminded of this whenever IPO lockup talk comes up.

secretasiandan 15y ago
Cuban used a synthetic hedge. "After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had." http://www.fastcompany.com/magazine/63/fasttalk.html http://www.fastcompany.com/magazine/63/fasttalk.html So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.
- blacksmythe 15y ago
  >> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk. True, although at that time those two were highly correlated.