Updated this post from March, 2017, today (5/2/18) with a new chart since SNAP a short below 23.50 last year cashed today to 11 on news Facebook would compete with its Tinder service.
When a hot IPO is launched, as was the case with Snapchat (SNAP) on March 2, the headlines are usually how much it leaped over it initial offer price. That is a worthless commentary. Unless one is on some broker’s favored clientele list, it is impossible to have the stock and to be able to sell it on that leap.
So what to do?
With IPOs this is actually one of the easiest decisions in stock trading. Simply note the high price and the low price on day one of the IPO. Those are the lines in the sand (see chart 0f SNAP below).
Buy on a close above the high of the first with a stop loss below the high of the first day. With SNAP that buy would have been at 27.09 on March 3 and it would have been stopped out the next trading at at 26.05, a loss of .3% (that’s the way it goes sometimes). From there, SNAP declined to an all-time low of 18.90 so that stop loss would have saved a lot of money, to say nothing of the anxiety of being locked into a foolish IPO buy made on whatever day.
It would have been a short sell below 23.50 if the stock could have been borrowed (difficult if not impossible this early in the IPO’s life). Regardless, today the stock is challenging its “First-Day Box” which would stop out any short sale. A drop again below the box would be a signal to again short the stock.
So what to do now?
Basically nothing on the long side. Until it shows it can trade through its first day, it is not a buy. On the short side (easier to do now) it will be a short on the first down day below the box with the stop loss in the box.
In stock trading there are no easier decision to make than playing off an IPO’s First-day box.
P.S. when a long buy goes well it can become long-term hold as in the case of ACRS, a buy at 12.50 (see the chart below).
(right click on the chart for a better view)