Thursday, September 18, 2014

Alibaba IPO strategy

I don't have the connections to get in on the actual IPO of Alibaba (BABA), so I'll be playing it strictly on the secondary market. They'll "price" the IPO this evening sometime, like in the $66 to $68 range. About an hour or two before the market open on Friday brokerages will start taking "indications" or limit orders. No market orders are permitted before BABA itself opens, which could take a half hour or more after the normal market open when the market makers see those indicated orders settle into an orderly market or a fairly narrow range.
 
My guess is that BABA could open at a 20% premium to the IPO. So if it prices at $70 due to very strong interest, it could open at $85. That's a fair (but not great) price to me. Sure, it could come in at $100 or more, or maybe only $80 or $75 with equal probability.
 
As soon as I see the initial indications, I'll place a limit order of only modest size a fair amount below the indicated price at that moment. I'll watch it carefully and move my limit order up or down as the indication changes. As we get closer to the normal market open at 9:30 AM I'll narrow my limit order to just a little below the indication.
 
If the indication is substantially higher than the IPO price, shortly before the normal market open I may split my limit order in half, with half at or above the indication to assure that I will get a small position at the open, and half a moderate amount below the indication to catch any moderate dip during the day. Later in the day on Friday I may make a second purchase if the stock dips significantly from the opening price.
 
My main strategy is to not go "all in" on the secondary market at the IPO, but to expect to buy more on later dips, as I did with Twitter and Facebook. So, my total position size at the end of the day on Friday may only be half of my ultimate position size.
 
It will be interesting to see how Twitter (TWTR), Facebook (FB), and Amazon (AMZN) react as the BABA IPO plays out.
 
Note that BABA will be listed on the New York Stock Exchange, as Twitter is, so it will have no direct impact on the NASDAQ index, except to the degree that Amazon, Facebook, et all move in reaction to the IPO.
 
I'm definitely not betting on any single horse here. We have a lot of very strong companies out there now – and a lot more waiting in the wings. The dot-com era is about to be eclipsed, big time.
 
-- Jack Krupansky

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