Hyatt Hotels is going public. The well known hotel chain owned by the Pritzker family is offering 38 million shares which are expected to be priced between $23 and $26. The market value of the IPO will run a little over a billion dollars. The price of the spread between $23 and $26 is $108 million. That is a lot of money for a wise trader to be aware of in trading IPO’s. Knowing how stocks are likely to sell and knowing how stock values will fluctuate can make the day trader money in trading IPO’s whether they might be Hyatt hotels or anyone for that matter. Market value comes from consensus and consensus is obtained through trading.

An IPO is an “initial public offering.” In trading IPO’s it is good to understand two basic situations. Usually, in trading IPO’s it is a small, new company looking for capital to develop a new product to expand their market that is making the initial public offering. On the other hand in trading IPO’s it may be an older, privately owned company. In this case the owners may be raising capital by selling stock instead of taking out a loan or they may be providing family members a means taking money out of the company.

In the case of trading IPO’s of smaller companies it may be difficult to predict what the “real” value of the company might be once the public offering is over and the shares are all sold. This is where the well educated trader can make a nice profit in trading IPO’s in trading the predictable fluctuation in stock price and market value in the first days after the IPO.

In the case of an older firm, such as Hyatt Hotels, more is known about the company. However, market psychology can be a funny thing and the price of the new Hyatt Hotels stock may still go up and down until a market consensus is reached. In the case of a company like Hyatt Hotels going public a trader needs to do his home work and be ready in trading IPO’s to scalp on high market volume and volatility or simply use a short straddle option once the stock is available.

An interesting and possibly profitable aspect of trading IPO’s these days is that the forwarding looking value of companies may be worth substantially more than what people are willing to pay today as the recession is still on the mend. Thus an IPO like Hyatt Hotels may provide trading opportunity going forward for the next couple of years.

In the case of trading IPO’s of newer, especially technology, companies the forward looking value will not be a global hotel chain but the possibility of a life saving cancer treatment or a new industrial process that will save billions. In this scenario it will be harder to predict value and prices may fluctuate drastically. Scalping and not being greedy may be the best bet in this case in trading IPO’s as what goes up can come down, and down, and down, or up and up and up. Depending upon whether you buy or sell the result in trading IPO’s can be dramatically good, or bad.

As always, having a good handle on market psychology and your own is critical to success in these situations. Study hard, be prepared, and good trading.

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