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Comment by jpdoctor | Hacker News Reader

Puts don't start trading immediately after the IPO. (There are also lockout/reporting requirements on derivatives, but I've always wondered how enforceable/detectable such transactions are.)

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I just remember there being a famous story of Mark Cuban buying out of the money puts on Yahoo stock after the acquisition of Broadcast.com. Obviously a different scenario, but always reminded of this whenever IPO lockup talk comes up.

Cuban used a synthetic hedge.

"After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had."

http://www.fastcompany.com/magazine/63/fasttalk.html

So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.

  >> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.

True, although at that time those two were highly correlated.

There are ways to hedge though, right?

yes, any good broker can set you up with a collar. you miss the upside but it will keep your price locked in until the lockout period expires. A lot of people do that.

If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.

Not usually, you need someone on the other side of the transaction. And even if the options were available, the volatility would make the spread very costly.

The standard way, if you are prohibited from trading that stock, is to buy derivatives that are short on a basket of similar stocks. This hedges against a general market fall, such as 2001.

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