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Finding the Lemon in the Lemonade

Lemodade inc (LMND) is a tech-driven insurance company that became public on July.

Its IPO price was 29$ per share and it raised 319$M at a valuation of 1.6B$.

On its first day of trading the stock traded up as much as 132% to 67$.


According to the IPO prospectus, the shares of pre-IPO holders are locked for 180 days (until Dec 29th). However there was an early lock-up period for 33% which ended after the release of the third quarter earnings (about 15m shares). On that day in Nov the stock was trading at 56$.


So, for traders that are following the dates of lock-up periods end, Dec 29th needs to show up on your calendar, as about 3B$ worth of shares will be free for sell.


Now lets see what happened to LMND stock price:


So this is what a short squeeze looks like. With borrowing costs over 80% (if you are lucky to find shares to borrow), there is no one that can sell the shares to the momentum traders that are buying it. At least not until the end of the lock-up period.


Let's examine the Skew of the options:


Obviously, the implied volatility is very high (over 100%), but given the distance of the stretch of the stock, it is not unreasonable to assume that it can mean revert and go under 100 in a very short timeframe.


Therefore, buying puts options before an important event of lock-up period expiration, may be a good strategy despite the high volatility.


Disclaimer:

The following trade frame is an example for educational purpose only.

We are not an investment advisory services, nor are we registered investment advisors or broker-dealers and do not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.

It should not be assumed that the methods, techniques, or indicators presented in this example will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. We, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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