What Is a Flip?
A flip generally refers to a dramatic directional change in the positioning of investments, for instance from long to short.
Depending on the context or kind of investment, the word 'flip' can have different meanings. At least four different examples exist including technical trading; real-estate investment; initial public offering (IPO) investing; and professional fund management.
- Flip is a term that can have multiple meanings in the investment world.
- Technical traders may flip direction and change their trades based on price action.
- Real estate investors may flip a house after owning it for only a short time.
- IPO investors may buy a new stock shortly after issuance and hope to sell it at a substantial gain in a relatively short period.
- Macro fund investors may flip from one asset class to another based on rising evidence of secular trend change.
Understanding a Flip
A flip, or reversal of one's position in the market, can be an effective way to generate profits from a new technical trend. Often, the notion of a flip is thought of as a short-term strategy, but this is not necessarily the case. Below, we look more closely at different uses of the term 'flip' in finance.
In technical trading, an investor can flip their position from net long to net short or vice versa based on price action. They might do this to benefit from a new trend, but the duration of that trend may only last a couple of weeks or over a year depending on the trader and their strategies. In the context of technical trading, a flip is commonly associated with a shift from having more long positions to having more short positions or vice versa.
In a net long, to net short flip, an investor could sell put options at various strike prices on their underlying holdings to benefit from falling prices. In the opposite scenario, an investor would increase their long positions in a security betting on price increases. These strategies allow traders to profit from price reversals occurring from a security investment over time.
Real Estate Investment
Broadly, the term flip can also refer to a real estate investing strategy in which the investor may acquire or control assets for a short time, add improvement of some kind to the assets, and then sell, or flip, the assets for a profit.
In residential house flipping, an investor attempts to buy a home at the lowest possible price. This investor often has the intention and the ability to renovate the home to increase its value. After renovations are complete, the investor relists the home for a higher price and sells it, retaining the difference for a profit.
Flipping IPOs for Quick Profits
IPO investing has a similar dynamic. An investor buys a security at what they expect is the best IPO price, whether before, at, or sometime after the actual IPO sale announcement, but when the buyer sells it depends on the kind of investment strategy and philosophy they have. Company owners expect to be able to hold on to their pre-IPO-issued shares and have no plan to sell quickly. Usually, they expect to build the share value substantially over a period of years.
But others who were not able to buy as company insiders or accredited investors instead look for the fastest period of appreciation they can get from their investments. These investors may specifically try to buy an IPO stock as low as they can and hold it until the stock has increased by 40 to 50 percent or more in a matter of weeks or months. They take profit and look for the next IPO to flip.
Among macro funds that seek to follow broad market trends, flipping may also occasionally be used. If a macro fund manager believes potential losses are high in a certain sector they may choose to flip those assets to a more profitable sector. This type of flipping can also be used by investors who take a macroeconomic approach to manage their portfolios. Flipping from at-risk sectors to sectors with greater return opportunities can be important in mitigating certain systemic or idiosyncratic risks.