Some weird stuff happening with NKLA. That’s the ticker for a startup called Nikola that did a reverse IPO last week (merging with the already-listed special-purpose company, VTIQ).
Nikola plans to sell various kinds of battery electric and hydrogen fuel cell trucks, with production scheduled to start in 2021.
When the reverse IPO was announced, the IPO price implied a valuation of NKLA at $3.3 billion. However, before the deal went through, the price of VTIQ rose from $10 in March to over $30 last week.
Then, after the combined company switched to the new ticker, NKLA, the price continued to rise, closing on Friday (June 5th) at $35, doubling on Monday to over $70 at close, and then continuing to rise to over $90 after hours, for a market cap over $30 billion, higher than the market cap of Ford.
The price has come down a bit today, and sits at $73 at the time I am writing this.
I have not investigated this company in detail. But some commentary from some amateur analysts whom I follow makes it sound to me like the hype has far outpaced the substance.
On Monday, I tried shorting at the open (via orders I’d placed the night before), but luckily for me, no shares were available to short (lucky since the price doubled that day). I tried again later in the day, and there were still no shares available.
It appears that the limited availability of shares to short has pushed traders into bidding up the prices of puts. If I’m reading the options chain right, it appears that a Jan 2022 synthetic long at a $50 strike (buying a $50 strike call and selling a $50 strike put) can be bought for roughly $0. Since the value of a synthetic long should be roughly equal to the price of the stock minus the strike, this implies a price of about $50 for the stock, in contrast to the $70+ price if you buy the stock directly.
That price discrepancy is so big that it seems like there’s a significant chance I’m missing something. Can anybody explain why those options prices might actually make sense? Am I just doing the options math wrong? Is there some factor I’m not thinking of?
Re: the options vs underlying, after chatting with a friend it seems like this might just be exactly what we’d expect if there is pent up demand to short, but shares aren’t available—there’s an apparent arb available if you go long via options and short via the stock, but you can’t actually execute the arb because shares aren’t available to short. (And the SEC’s uptick rule has been triggered.)
I’m thinking of taking advantage of the options prices via a short strangle (e.g. sell a long-dated $5 call and also sell a long-dated $105 put), but will want to think carefully about it because of the unbounded potential losses.
This page explains why the call option would probably get exercised early and ruin your strategy:
ITM calls get assigned in a hard to borrow stock all the time
The second most common form of assignment is in a hard to borrow stock. Since the ability to short the stock is reduced, selling an ITM call option is the next best thing. A liquidity provider might have to pay a negative cost of carry just to hold a short stock position. Since the market on balance wants to short the stock, the value of the ITM call gets reduced relative to the underlying stock price. Moreover, a liquidity provider might have to exercise all their long calls to come into compliance with REG SHO. That means the short call seller gets assigned.
I was going to say that it’s fine with me if my short call gets assigned and turns into a short position, but your comment on another thread about hard-to-borrow rates made me think I should look up the fees that my brokerage charges.
It looks like they’re a lot. If I’m reading the table below correctly, IB is currently charging 0.4% per day to short NKLA, and it’s been increasing.
Thanks for pointing this out!
> When the supply and demand attributes of a particular security are such that it becomes hard to borrow, the rebate provided by the lender will decline and may even result in a charge to the account. The rebate or charge will be passed on to the accountholder in the form of a higher borrow fee, which may exceed short sale proceeds interest credits and result in a net charge to the account. As rates vary by both security and date, IBKR recommends that customers utilize the Short Stock Availability tool accessible via the Support section in Client Portal/Account Management to view indicative rates for short sales.
It’s worse than that. If there weren’t any shares available at your broker for you to short-sell in the market, you should consider it likely that instead of paying 0.4%/day, you just are told you have to buy shares to cover your short from assignment. This is an absolutely normal thing that happens sometimes when it’s hard to find additional people to lend stock (which is happening now).
(Disclaimer: I am a financial professional, but I’m not a financial advisor, much less yours.)
Good writeup here explaining some details of the structure of the reverse IPO, and how that’s affecting share, warrant, and option prices. H/T Wei Dai
Some weird stuff happening with NKLA. That’s the ticker for a startup called Nikola that did a reverse IPO last week (merging with the already-listed special-purpose company, VTIQ).
Nikola plans to sell various kinds of battery electric and hydrogen fuel cell trucks, with production scheduled to start in 2021.
When the reverse IPO was announced, the IPO price implied a valuation of NKLA at $3.3 billion. However, before the deal went through, the price of VTIQ rose from $10 in March to over $30 last week.
Then, after the combined company switched to the new ticker, NKLA, the price continued to rise, closing on Friday (June 5th) at $35, doubling on Monday to over $70 at close, and then continuing to rise to over $90 after hours, for a market cap over $30 billion, higher than the market cap of Ford.
The price has come down a bit today, and sits at $73 at the time I am writing this.
I have not investigated this company in detail. But some commentary from some amateur analysts whom I follow makes it sound to me like the hype has far outpaced the substance.
On Monday, I tried shorting at the open (via orders I’d placed the night before), but luckily for me, no shares were available to short (lucky since the price doubled that day). I tried again later in the day, and there were still no shares available.
It appears that the limited availability of shares to short has pushed traders into bidding up the prices of puts. If I’m reading the options chain right, it appears that a Jan 2022 synthetic long at a $50 strike (buying a $50 strike call and selling a $50 strike put) can be bought for roughly $0. Since the value of a synthetic long should be roughly equal to the price of the stock minus the strike, this implies a price of about $50 for the stock, in contrast to the $70+ price if you buy the stock directly.
That price discrepancy is so big that it seems like there’s a significant chance I’m missing something. Can anybody explain why those options prices might actually make sense? Am I just doing the options math wrong? Is there some factor I’m not thinking of?
Re: the options vs underlying, after chatting with a friend it seems like this might just be exactly what we’d expect if there is pent up demand to short, but shares aren’t available—there’s an apparent arb available if you go long via options and short via the stock, but you can’t actually execute the arb because shares aren’t available to short. (And the SEC’s uptick rule has been triggered.)
I’m thinking of taking advantage of the options prices via a short strangle (e.g. sell a long-dated $5 call and also sell a long-dated $105 put), but will want to think carefully about it because of the unbounded potential losses.
This page explains why the call option would probably get exercised early and ruin your strategy:
I was going to say that it’s fine with me if my short call gets assigned and turns into a short position, but your comment on another thread about hard-to-borrow rates made me think I should look up the fees that my brokerage charges.
It looks like they’re a lot. If I’m reading the table below correctly, IB is currently charging 0.4% per day to short NKLA, and it’s been increasing.
Thanks for pointing this out!
> When the supply and demand attributes of a particular security are such that it becomes hard to borrow, the rebate provided by the lender will decline and may even result in a charge to the account. The rebate or charge will be passed on to the accountholder in the form of a higher borrow fee, which may exceed short sale proceeds interest credits and result in a net charge to the account. As rates vary by both security and date, IBKR recommends that customers utilize the Short Stock Availability tool accessible via the Support section in Client Portal/Account Management to view indicative rates for short sales.
https://ibkr.info/article/41
It’s worse than that. If there weren’t any shares available at your broker for you to short-sell in the market, you should consider it likely that instead of paying 0.4%/day, you just are told you have to buy shares to cover your short from assignment. This is an absolutely normal thing that happens sometimes when it’s hard to find additional people to lend stock (which is happening now).
(Disclaimer: I am a financial professional, but I’m not a financial advisor, much less yours.)
Thanks!
Good writeup here explaining some details of the structure of the reverse IPO, and how that’s affecting share, warrant, and option prices. H/T Wei Dai