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Lockup Expirations

Written By Brian Hicks

Posted February 12, 2008

**Editor’s Note:

In my February 5, 2008 How to Invest in LEAPS” article, I recommended buying the January 2010 CREE 30 calls (YFAAF). At the time, the LEAPS trade was quoted at $7. Today, five trading days later, YFAAF was last quoted at $8.50. That’s a 21% gain.

Not too shabby. While we do have an options product on the way, Small Cap Trading Pit has been trading options with small cap opportunities, too.

Congratulations if you bought.

Let’s jump into how to make even more money… Enjoy, my friends.


As part of our ongoing educational Wealth Daily series, including How to Invest in LEAPS and How to Invest in Options, I wanted to bring your attention to lockup expirations… and, specifically, how to spot trends with stock unlocks.

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. See the chart below to see what I mean…


eToys chart


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. Here are some unlocks to keep on radar for the remainder of March 2008.

  • March 10, 2008 – Encore Energy (ENP) is unlocking 9.0 million shares.
  • March 18, 2008 – AthenaHealth (ATHN) is unlocking 6.3 million shares.
  • March 25, 2008 – Babcock & Brown (FLY) is unlocking 18.7 million shares.
  • March 26, 2008 – China Architectural (RCH) is unlocking 737,000 shares.
  • March 26, 2008 – Duff & Phelps (DUF) is unlocking 8.3 million shares.
  • March 31, 2008 – Beacon Federal (BFED) is unlocking 9.5 million shares.
  • March 31, 2008 – Constant Contact (CTCT) is unlocking 6.7 million shares.

Take care,

Ian L. Cooper