6 ms·

If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded

by nemo44x 12y ago

If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if the stock tanks in that time you keep your now less valuable shares but you got some premium. So, after selling calls you can take that money you made from the premium and buy puts with it at around the same price. You've created a spread here and have locked in a selling price and gave yourself some downside insurance - all for very little cost to you over all since the covered call premium paid for most, if not all of your puts. Your only risk now is that the stock goes through the roof and you miss out on some upside - but that makes sense as you've eliminated risk for very little out of pocket cost. So maybe you do this on 1/2 or 2/3 of your position or whatever you're comfortable with. Of course the difficulty is if you have a ton of stock and the option market for your company isn't very large and therefore illiquid.

deleted 12y ago
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chollida1 12y ago
This is good advice, with 2 caveats. 1) Options don't start trading until well after the stock has gone public, usually atleast 3 months so you can't use this method to hedge out of the IPO gate. This is an exchange issue, not a liquidity issue. 2) So, after selling calls you can take that money you made from the premium and buy puts with it at around the same price. Put call parity assures you that you won't make enough selling calls to buy puts at around the same price. ie you'll need to put some of your own money into this. I think the author did a good job of indicating this but it should be made clear to people before tyring to do this. To be clear, following this strategy it helps lock in a price lower than the current market price for your shares, so you know what you'll make if the stock goes down. However it also means that if the stock takes off you won't get any of the upside. Keep that in mind as it can be very hard psychologically to watch everyone else around you make money while you've capped your upside.
- nemo44x 12y ago
  Indeed about the put/call parity. Or, you simply buy puts at a different strike and take on some risk. But yeah, you'll probably spend some money to "lock up" this deal. And you're right, options generally take some time to begin trading - especially if the volume is low on the common stock anyhow. Another method if you can is simply short the stock as soon as you like the price. Then replace the stock when your stock is freed up. Naturally this requires margin and problem that you could get margin called if the stock goes through the roof! Hedge with calls then that are way out of the money then too. Also, there's the issue of shorting your own company!
  - crito114 12y ago
    Indeed, most companies have insider trading policies that prohibit taking short positions.
bokonist 12y ago
The company and investment banker make you sign a contract saying that you will not buy or sell any derivatives or options or any security based on the stock. Now they probably couldn't catch you, and I'm not exactly sure what happens if you refuse to sign the contract, but it is also not necessarily worth the legal risk to attempt your proposed strategy.
m_evans 12y ago
This is typically not the case. The lock-up specifically prohibits trading options, pledging shares as collateral for debt, selling shares, or gifting shares to charities. It also usually a catch all for benefiting directly or indirectly (through a trust or foundation) Source: I founded GrubHub and wrote the article referenced here.
- nemo44x 12y ago
  Thanks for information - I wasn't aware this applied to non-insiders or ex-employees too for derivatives that expire after the lock-up. I guess no amount of financial engineering can unscrew the little guy. :) BTW, love your company and use it often, thank you!
  - timr 12y ago
    This was my experience, as well: my lock-up contract explicitly forbade trading in any company security, derivative, etc. I don't know how they'd enforce this, however. Seems like you'd have to have a big mouth, and they'd have to be willing to fire you for it.
    - prostoalex 12y ago
      They don't enforce it pre-emptively, but can hit you with a case many years after if the amounts involved are worthwhile of investigator's attention.
      - timr 12y ago
        Unless the lockup restriction is part of your state's laws (it isn't in California, AFAIK), it's not a matter for an "investigator" -- it's a private contract between yourself and your company. It does vary state by state, though, so I suppose it's possible that some states have laws that prevent you from trading in derivatives during a lockup period.
- caseysoftware 12y ago
  Thanks for the article. It's really fantastic and eye-opening on the process, how things happen, and who's involved at each stage. I've been watching a couple companies closely to figure out when/if they're going to go and now I have a better sense of the process.

by nemo44x 12y ago

deleted 12y ago

[deleted]

chollida1 12y ago

This is good advice, with 2 caveats. 1) Options don't start trading until well after the stock has gone public, usually atleast 3 months so you can't use this method to hedge out of the IPO gate. This is an exchange issue, not a liquidity issue. 2) So, after selling calls you can take that money you made from the premium and buy puts with it at around the same price. Put call parity assures you that you won't make enough selling calls to buy puts at around the same price. ie you'll need to put some of your own money into this. I think the author did a good job of indicating this but it should be made clear to people before tyring to do this. To be clear, following this strategy it helps lock in a price lower than the current market price for your shares, so you know what you'll make if the stock goes down. However it also means that if the stock takes off you won't get any of the upside. Keep that in mind as it can be very hard psychologically to watch everyone else around you make money while you've capped your upside.

nemo44x 12y ago
Indeed about the put/call parity. Or, you simply buy puts at a different strike and take on some risk. But yeah, you'll probably spend some money to "lock up" this deal. And you're right, options generally take some time to begin trading - especially if the volume is low on the common stock anyhow. Another method if you can is simply short the stock as soon as you like the price. Then replace the stock when your stock is freed up. Naturally this requires margin and problem that you could get margin called if the stock goes through the roof! Hedge with calls then that are way out of the money then too. Also, there's the issue of shorting your own company!
- crito114 12y ago
  Indeed, most companies have insider trading policies that prohibit taking short positions.

bokonist 12y ago

The company and investment banker make you sign a contract saying that you will not buy or sell any derivatives or options or any security based on the stock. Now they probably couldn't catch you, and I'm not exactly sure what happens if you refuse to sign the contract, but it is also not necessarily worth the legal risk to attempt your proposed strategy.

m_evans 12y ago

This is typically not the case. The lock-up specifically prohibits trading options, pledging shares as collateral for debt, selling shares, or gifting shares to charities. It also usually a catch all for benefiting directly or indirectly (through a trust or foundation) Source: I founded GrubHub and wrote the article referenced here.

nemo44x 12y ago
Thanks for information - I wasn't aware this applied to non-insiders or ex-employees too for derivatives that expire after the lock-up. I guess no amount of financial engineering can unscrew the little guy. :) BTW, love your company and use it often, thank you!
- timr 12y ago
  This was my experience, as well: my lock-up contract explicitly forbade trading in any company security, derivative, etc. I don't know how they'd enforce this, however. Seems like you'd have to have a big mouth, and they'd have to be willing to fire you for it.
  - prostoalex 12y ago
    They don't enforce it pre-emptively, but can hit you with a case many years after if the amounts involved are worthwhile of investigator's attention.
    - timr 12y ago
      Unless the lockup restriction is part of your state's laws (it isn't in California, AFAIK), it's not a matter for an "investigator" -- it's a private contract between yourself and your company. It does vary state by state, though, so I suppose it's possible that some states have laws that prevent you from trading in derivatives during a lockup period.
caseysoftware 12y ago
Thanks for the article. It's really fantastic and eye-opening on the process, how things happen, and who's involved at each stage. I've been watching a couple companies closely to figure out when/if they're going to go and now I have a better sense of the process.