People loved Nikola but not its warrants

https://www.bloomberg.com/opinion/articles/2020-07-21/people-loved-nikola-but-not-its-warrants

by kgwgk • 6 years ago

77 53 6 years ago

jluxenberg• 6 years ago

Matt Levine's column is awesome! You don't need to be a Bloomberg subscriber to receive it. You can sign up to get it in your email inbox daily here, for free: http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s...

matthewmcg• 6 years ago

And then use an email-to-RSS service to get the full columns in your newsreader...

klenwell• 6 years ago

Here was a trade. Nikola Corp., the maybe-one-day-electric-truck-maker that went public via a blank-check merger last month, has a lot of warrants outstanding. Each warrant (ticker NKLAW) allows you to pay $11.50 to buy one share of Nikola common stock (ticker NKLA). The trade was:

Buy one warrant for $24.62.

Pay $11.50 to exercise the warrant and get a share of stock.

Sell the stock for $48.84.

You pay $24.62 + $11.50 = $36.12. You get $48.84. Your profit is $12.72. Pretty good, no?

Levine suggests this weird situation was a consequence of his(?) "boredom markets hypothesis":

For a while Nikola was one of the most popular stocks on Robinhood, the day-trading phone app; the warrants were not.

He lays out the best-case scenario for the savvy trader of Nikola. On the flip side, is the worst case scenario for the Robin Hood trader buying the stock last week at $48 and then seeing it drop to $38 on Monday?

For the record, it looks like NKLA is around $36 at the moment.

beervirus2• 6 years ago

His theory seems plausible enough, especially given that when the trade became possible and the prices were forced to converge... it was the share price that had the bigger correction.

mpalczewski• 6 years ago

You could (short) sell the stock at the same time you buy the warrants.

CPLX• 6 years ago

Not really. He covers that in the article.

beervirus2• 6 years ago

That probably occurred to the author who used to work at Goldman.

oh_sigh• 6 years ago

Here's an interesting article that explains why that wouldn't work here: https://www.bloomberg.com/opinion/articles/2020-07-21/people...

fny• 6 years ago

You can't directly short them because of the borrowing fees, but you could create a synthetic short with options.

aeious• 6 years ago

robinhood doesn't allow you to trade warrants at all actually. if they did i think warrants might have traded above the stock since they're generally cheaper and promise greater returns

ballenf2• 6 years ago

Can someone explain the 600% cost to short Tesla(1) stock that's discussed? I mean in terms of how that is set -- is it market driven or regulator driven?

What would cause such a rate to go up without the stock evidently coming down to reduce the arbitrage discussed?

1 thanks for correction. Meant to say "Nikola" stock.

ahh• 6 years ago

Mostly market driven (I expect there are some regulatory concerns too but I don't know any offhand.) What this means is that there are very few holders of TSLA stock who are willing to lend it compared to the number of people who'd like to be short. I'm not sure precisely what that does imply about the people holding it; typical institutional holders do happily lend out stocks, which is why typical short financing costs are low.

xondono• 6 years ago

It implies that a higher than average percentage of holders weren’t institutional entities, since they knew the price would go down (even if they didn’t knew the magnitude of the drop), but rather small investors unaware of the warrants

sp332• 6 years ago

*NKLA

necubi• 6 years ago

This is actually about Nikola Motors which (despite their clear efforts to associate themselves) has nothing to do with Tesla.

Nikola is hard to short right now primarily for two reasons:

1. It's a brand new company (IPO'd last month) with a large number of non-institutional share holders, who are not likely to lend out their shares.

2. It seems ridiculously overvalued (even after falling a fair bit it still has a $13B market cap despite having developed no products!), leading to _huge_ demand from shorts.

kevin_thibedeau• 6 years ago

Why is a company without a revenue stream even listed on a stock market?

intuitionist• 6 years ago

Technically it didn’t IPO in any traditional sense, it went public via a reverse merger with a blank-check company, which is why these warrants are floating around out there.

OJFord• 6 years ago

Short selling involves borrowing stock from A, and selling it to B. If C also wants to borrow stock from A to sell to B, A sees increased demand (upward pressure on cost of borrowing stock) but B doesn't see increased supply, they can only buy from whoever ends up borrowing from A (not a downward pressure on stock price).

totalZero2• 6 years ago

It's market driven.

If you want to sell the stock short, you have to borrow it. If there's nobody who can loan it to you, you can't borrow it so you can't sell it short. Technically, you (or your broker) have to know where you'll borrow the stock before you're allowed to sell it short. In trader parlance this is called a "locate".

When supply of loanable stock is low and short interest is high, the rate gets expensive. For example, this happens on stock holdings with lock-up provisions that prohibit long holders to loan or sell stock until a particular date. Among other reasons, this may happen after an employee stock option exercise, or after an IPO.

There's a process called "rehypothecation" where a broker can loan shares from long Client A to short-selling Client B, charging a rate to Client B and paying a cut of it to Client A. They can also loan shares to other firms.

The borrow rate is independent of the stock price. If the stock rallies, short sellers may add to their position, or they may blow out. If the stock sells off, short sellers may take profits, or they may pile in and ride all the way down.

In addition to stock loan, there is a swaps market and a rev/con market. So there are various ways for the market to absorb demand for borrow. Like, if Bank ABC is long a ton of shares and the rest of the street is short, Bank ABC can sell put on a rev/con, which will imply the short rate despite the bank actually having no need to locate and borrow shares. This kind of action naturally sets the price for borrow. No regulators involved.

JumpCrisscross• 6 years ago

For a while Nikola was one of the most popular stocks on Robinhood, the day-trading phone app; the warrants were not. The stock benefitted from hype and publicity and momentum, but the warrants didn’t, because they are called “warrants” and weren’t mentioned in the first paragraph of all the news articles.
if you noticed the relative-value trade, you might be exactly the sort of person who wouldn’t have wanted to make an unhedged directional bet on Nikola’s stock

smabie3• 6 years ago

A great example of how when you see an arbitrage opportunity, it probably isn't actually risk free (i.e it isn't actually arbitrage). Usually there is some risk that is taken on: counter-party risk, liquidity risk, etc. That's not to say you can't make money, you just need to be cognizant of these "hidden" risks.

ballenf2• 6 years ago

Reminds me of a personal rule I have about real estate: there are no undervalued properties, except those resulting from my personal value system differing substantially from the market and I'm planning to hold on to the property long enough to realize that value (because when I sell presumably the market's values won't have changed much).

In reality, of course there are better and worse deals out there, but the rule keeps me from thinking I'm smarter than the market and being blind to risks or problems that others have seen.

beerandt3• 6 years ago

My personal rule: if it actually hits the market (ie gets listed on a mls or the seller has already signed a realtor) then 99.9% chance you're already beyond the point of getting a good deal. That is, a good enough deal to purchase strictly as an investment.

taneq• 6 years ago

So basically the markets aren't always perfectly rational, but they're not stupid either.

nickik• 6 years ago

Nikola is a downright scam. Literally nothing they say makes sense or has any credibility. On one hand they claim magical technical improvements on the other they claim to have partners do basically everything.

They have not shown credible prototypes of their vehicles. They don't have a factory or locked in partners with a factory.

They are essentially a couple 100 people in an office and many of them seem to be in marketing.

They couldn't get funding threw venture capital so did the reverse merger thing to be able to be stock traded. That was great for them because their 'we are Tesla but also totally different and much better' routine works with people who don't know the industry.

riffraff• 6 years ago

Nikola feels scammy as hell, but didn't they announce a partnership to produce their vehicles in Europe with some of the established large producers?

(Also they are partially owned by CNH IIRC, so that seems easy to do).

AnthonyMouse• 6 years ago

If we learned anything from Tesla it's that electric cars are a very "fake it 'till you make it" industry. You have to raise a ton of capital to get off the ground but once you're making a real product, people buy it.

But you can't exactly go down to the local credit union and apply for a twenty billion dollar loan. So the only way to build something is to hype the nothing that you currently have in order to get investors to give you a ton of money so you can actually build something.

It's like the people confused about Tesla's current share price in the middle of a pandemic. But it's the response to the pandemic which has given them the greatest boon they could have asked for -- very low interest rates. That causes investors to borrow money to invest, which is what's holding up stock prices in general. But on top of that they're selling a product with a higher up-front cost and lower operating costs, so lower interest rates make for lower car payments make for more customers. The company itself still has a lot of outstanding debt which can now be refinanced, and lower interest rates make it cheaper for them to borrow even more to continue expanding.

Nikola benefits from a lot of that too, though you can't really gain customers through low interest car loans before you have a product. The issue for Nikola is that "fake it 'till you make it" only works if you eventually make it. If they don't generate enough hype to raise as much capital as they need to actually bring a viable product to market before the bottom falls out, poof.

llsf2• 6 years ago

I am wondering if the current Tesla high stock price is also lifted up by short squeeze. Some of the billions of dollars shorting Tesla are giving up, as they do not see a way to make money in the foreseeable future.

simonebrunozzi2• 6 years ago

Might be, and I'd agree with you.

But who knows? Maybe a big European or Japanese carmaker (many of them have mentioned their desire to pursue H2/fuel cells cars) decides to acquire them to speed up the transition, in which case, even if it's all vaporware, the stock might be worth something.

skinnymuch2• 6 years ago

I think only Toyota, VW, and Tesla have market caps over $50B. I know market cap isn’t everything. But still, Nikola appears far too big. Not sure what these car companies could spend, but even $5B seems too much for an investment. Nikola has to drop 4x at least.

gutino• 6 years ago

I was interested in Nikola, but after listen its founder Trevor Milton talk, i vomit right onto the desk.

He simple believe he transformed the transport industry and tesla is just following their footsteps. He talk how Nikola has the best truck ever created and its just a render.

Seriously, listen to that guy is disturbing.

People loved Nikola but not its warrants

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