These SPAC options have really high implied volatility. Makes me want to sell them. The market tends to overestimate option volatility around known events because demand for options is very high at those times. Maybe a SPAC acquisition is similar. I’m not sure.
A covered call, or equivalently, a deep-in-the-money cash-covered put seems like a pretty good bet. The puts are simpler since you don’t have to buy the shares, but the calls probably have better liquidity. If the bubble keeps inflating, you can keep some of that upside. If it pops, the premium from the option makes it hurt less. And you don’t expect the shares to end up worth less than $10, which limits the risk even more.
Out-of-the-money short puts also look promising. Between the premium and the $10 floor, the 12.5 May puts on both HCAC and TRNE look like free money right now. If it does end at $10 in May, you get nothing, but if there’s a vol crush or price spike between now and then, you could exit and collect most of it early.
I’m also wondering about exotic spreads between the options and the warrants. The warrants seem a lot cheaper than the options. +27 HCACW / −1 HCAC 17.5 call (any date) also looks like free money right now.
[Epistemic status: thinking aloud about how else I might trade this. Not investment advice. There may be risks I’m not seeing yet. Don’t bet the farm.]
I’m now selling at-the-money call options against my remaining SPAC shares, instead of liquidating them, in part to capture more upside and in part to avoid realizing more capital gains this year.
Once the merger happens (or rather 2 days before the meeting to approve the merger, because that’s the redemption deadline), there is no longer a $10 floor.
Writing naked call options on SPACs is dangerous because too many people do that when they try to arbitrage between SPAC options and warrants, causing the call options to have negative extrinsic value, which causes people to exercise them to get the common shares, which causes your call options to be assigned, which causes you to end up with a short position in the SPAC which you’ll be forced to cover because your broker won’t have shares available to borrow. (Speaking from personal experience. :)
causing the call options to have negative extrinsic value, which causes people to exercise them
Duly noted. That seems like a good time to buy back the calls. And then buy some more to exercise yourself. Not sure how long this lasts. Maybe it’s enough to watch it twice a day, or maybe you have to program an order in advance.
Once the merger happens [...], there is no longer a $10 floor.
How much warning do we get to redeem the shares? Maybe that’s when you buy back the put. Although, if everybody thinks that at once and drives up the IV even more, maybe that’s time to sell another one instead.
These SPAC options have really high implied volatility. Makes me want to sell them. The market tends to overestimate option volatility around known events because demand for options is very high at those times. Maybe a SPAC acquisition is similar. I’m not sure.
A covered call, or equivalently, a deep-in-the-money cash-covered put seems like a pretty good bet. The puts are simpler since you don’t have to buy the shares, but the calls probably have better liquidity. If the bubble keeps inflating, you can keep some of that upside. If it pops, the premium from the option makes it hurt less. And you don’t expect the shares to end up worth less than $10, which limits the risk even more.
Out-of-the-money short puts also look promising. Between the premium and the $10 floor, the 12.5 May puts on both HCAC and TRNE look like free money right now. If it does end at $10 in May, you get nothing, but if there’s a vol crush or price spike between now and then, you could exit and collect most of it early.
I’m also wondering about exotic spreads between the options and the warrants. The warrants seem a lot cheaper than the options. +27 HCACW / −1 HCAC 17.5 call (any date) also looks like free money right now.
[Epistemic status: thinking aloud about how else I might trade this. Not investment advice. There may be risks I’m not seeing yet. Don’t bet the farm.]
I’m now selling at-the-money call options against my remaining SPAC shares, instead of liquidating them, in part to capture more upside and in part to avoid realizing more capital gains this year.
Once the merger happens (or rather 2 days before the meeting to approve the merger, because that’s the redemption deadline), there is no longer a $10 floor.
Writing naked call options on SPACs is dangerous because too many people do that when they try to arbitrage between SPAC options and warrants, causing the call options to have negative extrinsic value, which causes people to exercise them to get the common shares, which causes your call options to be assigned, which causes you to end up with a short position in the SPAC which you’ll be forced to cover because your broker won’t have shares available to borrow. (Speaking from personal experience. :)
I closed my HCAC put at a small profit today.
Looks like HCAC wants to acquire Canoo. Roth Capital analysts are targeting $30.
Looks like TRNE became Desktop Metal Inc. (DM). I had sold a 12.5 May put on TRNE and closed it today by buying back the DM put at a profit.
Duly noted. That seems like a good time to buy back the calls. And then buy some more to exercise yourself. Not sure how long this lasts. Maybe it’s enough to watch it twice a day, or maybe you have to program an order in advance.
How much warning do we get to redeem the shares? Maybe that’s when you buy back the put. Although, if everybody thinks that at once and drives up the IV even more, maybe that’s time to sell another one instead.