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How to Pull in 50% in the Next Month

Written By Brian Hicks

Posted January 6, 2011

“Ian, when your R-4 Trigger doesn’t pick up a good trade [in Options Trading Pit], what do you do to find trades?” was the question David K. sent in this morning.

Thanks for the question David.

The R-4 Trigger is one of our main trading systems… but it’s not the only one we rely on for all of our gains. With great success, we also trade on the news, trade on momentum, unlock dates, other technical events, and trade on FDA decisions months before the actual decisions are even made.

While our very successful R-4 Trigger system will be relied upon heavily with Bollinger Bands, Williams % Range, candlesticks, MACD and DMI… we’d be limiting your profit potential if we didn’t have other “detectors” out there.

It’s what keeps us “ahead of the herd.”

Take our FDA trade, Protalix (PLX), for example. We picked this up in December 2010, awaiting momentum as we head into the February 2011 PDUFA decision. It’s already up about 45% from our $1.50 entry point.

Or take our plays on the silver ETF (SLV). We chased momentum for 150% on the calls, and about 40% on half of the SLV put.

Or take a look at Anadarko (APC), which we profited from several times with well-placed calls on news that no one picked up on.

You see, with just one system, you’re limiting yourself. It’s why we’ve developed several systems; all of which have turned out to be very profitable.

Or, as we’ve been playing with… take a look at lockup expiration dates for “easier made” profits. For example, take a look at what happened to Tesla Motors (TSLA) last week.

tesla motors chart 2011

Shares just fell out of the blue, right?

Not exactly… Insiders were finally allowed to sell their shares in a period known as the “unlock period,” or “lockup expiration.” The lockup is a 180-day period in which insider selling following IPO were restricted.

Owners of 75 million shares could begin selling.

Or, take a look at Motricity around its December 14, 2010 unlock date. It fell just as predicted.

motricity chart 2011

Here’s how it works… and how we profit from the “event.”

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.

Contractually, insiders 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 is set up to ensure that insiders cannot profit from the early trading frenzy generated by an IPO. It provides stability because insiders cannot dump their shares. But once the lockup period expires, anything goes, and insiders are allowed to sell their shares.

If insiders are realizing a significant gain on an investment, they can cash out at lockup expiration, like they did with eToys in 2000, for example.

eToys chart in 2000 

Insiders sold the stock heavily from October to December 1999, flooding the stock float with shares, and forcing the stock down from an $80+ high to less than $20.

Insiders cashed in, flooding the market with shares, and forcibly sent 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.

How To Spot Lockup Expiration 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.

Other times, if for example, few shares were initially sold in an IPO, an increase in the float can have a long-term positive effect on the stock. I’ve seen cases where the release of unlocked shares can make a stock more attractive, like Verticalnet in 2000. Once the lockup expiration happened, the stock went to the moon.

For bearish opportunities, you want to look for stocks that had significant run ups as they head into lockup expiration.

How to Make 50% in the Next Month

One of the latest high-fliers has been Molycorp (MCP), a stock that’s run from $35 to $62, handing some readers fat gains in a small window of time. But here’s the thing. We’re about go short the stock shortly.

And that’s because the stock will unlock 28.125 million shares on January 25, 2011. And there’s a good chance insiders could take gains… well, if they’re smart. Plus, that 28.125 million shares is just about equal to the 27 million share float, which could add considerable downside weight to lofty valuations.

molycorp chart 2011

But Molycorp isn’t the only way to profit over the next few weeks…

Not only will Options Trading Pit have more R-4 Trigger trades… we’ll feature more of these unlock trades that could pay off substantially. Here are some of the plays we have on radar for February 2011, for example.

  • On February 2, Intralinks Holdings (IL) will unlock 11 million shares

  • On February 8, MakeMyTrip Ltd (MMYT) will unlock 5 million shares

  • On February 9, Electromed Inc. (ELMD) will unlock 1.7 million shares

Of course, there’s plenty more. But to list more than 100 unlock dates would take quite a while.

Again, stay tuned for trades like these, and our “main system” R-4 Trigger trades.