Friday, May 11, 2012

FB: Playing the IPO

The big week has finally arrived. Facebook Inc. (FB) goes public on May 18 (Friday) in an initial public offering intended to raise $10.6 billion for the social networking company that we have all grown to love.

The initial price offering is expected to be from $28 to $35. The IPO is said to be wildly over-subscribed, and that large demand will no doubt make for a few days of interesting trading.

So how to play FB?

Long-time readers will know of my intense aversion to news-based trading, and an IPO is the ultimate news play.

The London financier Baron Nathan Rothschild said in 1810, in the context of the Napoleonic wars, "Buy on the sound of cannons, sell on the sound of trumpets."

In the case of the Facebook IPO, the cannons sounded long ago when the company announced it was going public. And we all know when the trumpets will sound: At 9:30 a.m. Eastern on Friday, May 18.

The event is fully anticipated, and everything knowable about Facebook will be entirely priced in upon the opening. Where the price goes from there will depend largely on the degree of hysteria, a feeble vehicle upon which to base my hopes of future riches.

The smart money -- the big brokerages -- will already be locked in to a price. They'll be hoping to sell shares to the dumb money without inside access, who will come rushing in to try to get some shares on the market.

Everyone is talking up FB as the next GOOG or AAPL. And so it may well be. Or not. It may well be the next RHAT. As a trader, I lack a crystal ball. I can only trade what I see before me on the charts.

So I won't be trading on opening day.

First, I want to see a trend. That means at least three bars on the daily chart, and they must be up intra-day and setting higher highs and higher lows before I'll be willing to call them a trend.

A more cautious trader will wait until there is a reversal from a high, followed by a reversal from a low that is above the opening price, and then a higher high. That rising zig-zag requires four days minimum, and could take much longer.

Second, I want stock options, so I can gain leverage and use a full range of strategies. Options on FB don't go on sale until six days after the shares start trading.

That day, when options go on sale, is the first day that I would consider trading FB.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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