People loved Nikola but not its warrants(bloomberg.com)
bloomberg.com
People loved Nikola but not its warrants
https://www.bloomberg.com/opinion/articles/2020-07-21/people-loved-nikola-but-not-its-warrants
7 comments
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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.
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.
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.
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
You could (short) sell the stock at the same time you buy the warrants.
Here's an interesting article that explains why that wouldn't work here: https://www.bloomberg.com/opinion/articles/2020-07-21/people...
underrated reply
Not really. He covers that in the article.
You can't directly short them because of the borrowing fees, but you could create a synthetic short with options.
That probably occurred to the author who used to work at Goldman.
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.
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.
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.
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.
>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.
So basically you have to be one of those companies that put out "cash for your house" ads?
So basically you have to be one of those companies that put out "cash for your house" ads?
Or you buy distressed properties.
A friend of mine invests directly in tax liens, and develops very good relationships with the people who were underwater. He usually works out an agreement with the homeowner to buy the house (lump sums are very valuable to these people) and rents it out to them for life, at a rate they can afford.
Sometimes, the people take the lump sum and run (and he gets the property). In other circumstances, he has a super loyal renter-for-life.
I might have gotten some subtle parts wrong, it's been a year since he last explained it to me. Obviously it's not for everybody, you really have to be a people person with a lot of empathy. :)
A friend of mine invests directly in tax liens, and develops very good relationships with the people who were underwater. He usually works out an agreement with the homeowner to buy the house (lump sums are very valuable to these people) and rents it out to them for life, at a rate they can afford.
Sometimes, the people take the lump sum and run (and he gets the property). In other circumstances, he has a super loyal renter-for-life.
I might have gotten some subtle parts wrong, it's been a year since he last explained it to me. Obviously it's not for everybody, you really have to be a people person with a lot of empathy. :)
[deleted]
Curious what you mean when you say strictly as an investment? In my worldview, if you are purchasing real estate as an investment, it means it generates income, meaning you plan to rent it out.
Or develop it. Or combine or subdivide parcels. Or as an alternative/hedge store of wealth.
Or even if you plan on living in it, if you want to make money when it comes time to sell, and not just break even, after accounting for total cost of ownership.
Most people who think they sell their house for a modest profit are wrong.
Or even if you plan on living in it, if you want to make money when it comes time to sell, and not just break even, after accounting for total cost of ownership.
Most people who think they sell their house for a modest profit are wrong.
This is only true in places where investment capital has taken over the market, not in places where individuals are scraping together funds to buy in an economically growing neighborhood.
I meant more along the lines that people don't take into account all the costs that they should when calculating their break-even price.
This is generally true regardless of the location, with the caveat that hot markets are more likely to have more professionals participating that know how to include those costs.
Often people see those higher prices as greedy profit (or as artificially high in order to gentrify, etc.), and developers do need to make a profit, but often times a large part of the elevated price is just including hidden costs that homeowners don't account for.
But looking at it from the other side, developers/investors are only going to enter markets where they believe there's a margin for profit. Which generally means those neighborhoods are a bit underpriced to begin with.
This is generally true regardless of the location, with the caveat that hot markets are more likely to have more professionals participating that know how to include those costs.
Often people see those higher prices as greedy profit (or as artificially high in order to gentrify, etc.), and developers do need to make a profit, but often times a large part of the elevated price is just including hidden costs that homeowners don't account for.
But looking at it from the other side, developers/investors are only going to enter markets where they believe there's a margin for profit. Which generally means those neighborhoods are a bit underpriced to begin with.
Real estate is the highest-leverage purchase most people can make, so even if you're living in it and plan to sell in the near-ish future, a 5% appreciation will yield you more net cash than a 5% appreciation on the same amount of down payment put into a "regular" investment. The obviously-oversimplified example is something like: put 20K down, buy a 100K place. Sell for 105K, your 20K is now 25K, assuming your mortgage payments were the same as what you would've paid for rent otherwise. Which is a 25% return on your 20K, even on just 5% appreciation.
You could just keep it and sell it in the future without renting it out. Or you could flip it I guess.
I call this speculation. In most real estate markets, a normal house is a depreciating asset that requires upkeep, maintenance, property taxes, and other liabilities.
No, not really. It's very rare for a house to depreciate, even if no repairs are being done. Moreover, property taxes are almost always going to be lower than the rise in price of the property.
And speculation and investing are the same thing, except the former is often used in a pejorative way.
And speculation and investing are the same thing, except the former is often used in a pejorative way.
That reminds me of the story of the economist and the $20 bill.
So basically the markets aren't always perfectly rational, but they're not stupid either.
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.
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.
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.
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.
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.
If that were the case then many long holders would sell and the price would revert. Short squeezing has undoubtedly contributed to the volatile rally of TSLA, but the fact that the price remains elevated is presumably due to something more than the price impact of closing shorts. For whatever reason, the market thinks TSLA is worth this price. Personally I think there are many retail traders who don't know too much about the market, get bored of other names, and want to be on the meteoric TSLA bandwagon. When that collapses it will be a sad day for Elon Musk.
When it collapses, it would be a sad day for the retail trader who came late. I would hope Elon Musk is not working at Tesla solely to increase his bank account. It seems that Musk was ready to get Tesla private for $420. It seems like Tesla could lose 3 times its current value and still be above that (in)famous $420. It would then be worth still $78B, which is already a lot (~Volkswagen's valuation). Although one can argue that Tesla is not just a car manufacturer, but how much solar and energy could bring?
I am also quite puzzled by the current Tesla valuation...
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.
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.
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.
That's a really good point. Forgot to consider that.
Oops I didn’t add that I looked that info up. Didn’t know it initially.
But yeah the contrast of valuations is wild.
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).
(Also they are partially owned by CNH IIRC, so that seems easy to do).
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.
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.
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.
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.
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.
Why is a company without a revenue stream even listed on a stock market?
They merged with VectoIQ which was a publicly traded company. As a consequence of the merger the combined company was still publicly traded and changed the symbol to NKLA.
"Publicly traded company" is technically true but misleading. VectoIQ was a special-purpose acquisition company [1] -- it had no employees and no revenue; its sole purpose was to be used as a vehicle to take another company (like Nikola) public.
[1]: https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
[1]: https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
Those should be called Special Corporations for Acquisitions and Mergers (SCAM). They only exist to sell to people who believe anti-fraud regulations are for losers and that real world markets should be more like EVE online.
I think before discussing that it’s worth discussing what’s the point of the stock market. That’s where people will actually disagree but one’s answer to “what’s the point of the stock market” will make clear the answer to “why is a company with no revenue listed at all?”
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.
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.
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.
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).
> 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
> 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
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.
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.