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How We're Profiting from the Legal Manipulation of this Stock

Written By Brian Hicks

Posted January 17, 2011

Back on January 6, we told you about a simple system that allows you to profit from the legal manipulation of stocks.  

We said:

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.

We even showed you a quick way to make 50% in a month, as we just did in Options Trading Pit… just days before Molycorp (MCP), a rare earth favorite that returned $20 on the upside, even unlocks shares.

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. 

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.

Here’s the before picture.

molycorp chart 2011


And here’s where the stock stands just days ahead of unlock.


That comes out to about 50% in less than a month using options… 

And we’ll have plenty more of these and trades from our main system R-4 Trigger trades.

Did you play along with Molycorp?  If so, how’d you do?