by Brice Oh

Created on: September 20, 2008   Last Updated: October 23, 2008

My experience in shorting an Initial Public Offering (IPO)

In August 2007, there was a correction period. However, IPO was still hot at that point of time. As I lost some money in longing stocks, I decided to go with the flow. Hence, I chose a more volatile stock IPO.

It was a day trade. On the very first day of the listing of this new IPO in the correction period, I decided to short it. Timing is crucial for a day trader. When the bell rang at 9am, I did not do anything. Understanding that the Big Boys' (BBs) would be manipulating the stock by pushing the price up, I waited. Indeed, it went up fast and furious for the first 30 minutes.

I used the reverse psychology in this trade. When the price went up fast and furious until a price which I feel like jumping into the boat to buy, I clicked sell. I shorted with half of my limit. Then I waited. It did sell down for a while, but went up again. Then I shorted the other half when everyone rushing to buy.

With the combination of fundamental analysis and market sentimental, I discipline myself not to cut profit' too early. Knowing' how the BBs manipulate the stock in order to exit at a right price, I played along with them. Fear and greed MUST be put aside during such trading. BBs would push up the price in order to exit with a profit and push down the price low enough to buy it at a bargain price.

In a new IPO, there is no technical analysis for us to make upon. However, we could rely on the day movement to predict where the low or high are. For every IPO, there would be buyers (longists'/'shortcovering') and sellers (IPO holders/'shortists'). In these 2 categories, we have the retail players and the institutional players. The BBs have the ability to control the market with its larger capital, and retailers would just be jumping into their trap' to carry the baby'.

Whenever you see a big buy up without much logical sense, you should know that the BBs are trying to exit by luring you to buy from them. At the same time, they would short the stock as they already know it would be going down ultimately. Hence, the BBs would earn double from it.

When I saw everyone is panicky selling, I was ready to cover back my short. Buy into fear, and sell into greed. It is a very simple theory but hard to follow. Emotion is what we need to control to do it right.

Comparing shorting and longing, I would say that shorting is more exciting. Most traders mentality are to buy instead of short. Through this shorting of IPO, I gained the confidence in making the right decision for the entry and exit point. It was an memorable moment when you know what the situation is going to be like and go with it. Earning a 20% of profit in one day is great, but gaining the experience of shorting is invaluable.

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