What other tech stock to consider?

[pz1975]

I was going to revise my original post, but waited too long. So based upon your feedback, I'm calculating it as this:

BULL CASE:
- buy 10,000 CCIV.WS @ $30 = $300,000 outlay (cash, not margin)
- sell 100 CCIV Naked Calls Jan 2022 @ $22.50 = $225,000 premium collected
when warrants can be transacted for shares, then:
- close out 100 CCIV Jan 2022 Naked Calls @ $30 = $300,000 (estimate of what the call price may be if S/P hits $90)
- buy 10,000 CCIV warrants @ $11.5 = $115,000 outlay (probably more cash)
- sell 10,000 CCIV shares @ $90 (number picked at random, pick your own) = $900,000 proceeds from shared
TOTAL: -$300,000 + $225,000 - $300,000 - $115,000 + $900,000 = $410,000 profit (minus any margin interest)

BEAR CASE:
- buy 10,000 CCIV.WS @ $30 = $300,000 outlay (cash, not margin)
- sell 100 CCIV Naked Calls Jan 2022 @ $22.50 = $225,000 premium collected
- 100 CCIV Naked Calls expire worthless = $0
- sell 10,000 CCIV warrants @ $0.75 = $7,500
TOTAL: -$300,000 + $225,000 + $7,500 = $67,500 loss (plus any margin interest)


So playing with the numbers, if you go for the lower-valued call of Jan 2022, then your bear case loss is greater.

My head is starting to hurt. LoL. Do these numbers look right? It looks like it really comes down to finding a call to sell that can bridge the delta between the SP and the warrant price, and then hoping that the share price doesn't zoom up above that call price. Right?

Your numbers look right except there would still be time value on the $90 call when bought back unless you wait until expiry.

Your second last paragraph isn’t clear - I think what you mean is choosing a call with a higher strike price (lower price of sale) results in a worse bear case (more potential loss) but better bull case (higher maximum profit).

Your last sentence - once the SP goes above the strike price of your covered call, it doesn’t matter how much above it goes anymore since you will have reached maximum profit. This is what you will root for!

And I look at the sale of the covered call as making the purchase of the warrants almost free (if you choose a low enough strike price for the call). When I first set this up, I bought warrants for $12.40 and sold covered calls (strike price $40) for $14.10. So I actually earned a credit. I have now rolled them out (Jan/22) and up to $60 strike price and am now at net debit of $1.30 per share, which is still really cheap for having such maximum profit ($44.70 per share) and limited loss (maybe $0.60 per share since warrants would always have some value).

 

[pz1975]

(emphasis mine)
To avoid limiting on the upside, don't sell the call. Selling the call makes the position a lot cheaper to get into though as it offsets the price of the warrants (and thus limits your potential losses).

You are right but then you aren’t optimizing the arbitrage situation (bull part using warrants, bear part using stock (done with sold calls)). I like the trade because the downside is so limited while the upside is enormous for such a low-risk trade. I’ve never seen such a crazy arbitrage potential before (although I don’t actively look for them).

 

[golfcart]

That is an interesting strategy to guarantee you make money on this merger. I’m always amazed to see how clever people can be when they have good information.

I can’t trade all those crazy options in my 401k so I just loaded up on stock at $12.50 when the rumors were first announced and there was really no arbitrage opportunity. When the gap between the warrants and stock became really large I sold all my stock between $30-35 and bought warrants at $13-$14.

Since then the warrants have risen a larger percentage than the stock and when the prices spiked today the stock rose 32% while the warrants rose 66% so I basically doubled my profit. I sold 20% of my warrants at $30 and kept the rest. So at this point I’ve basically covered my initial investment and the rest of my warrants are pure profit no matter what they do.

I actually think I’ll just sell all the rest of the warrants after the merger is official and the hype reaches its climax. Better take the guaranteed money rather than wait to see if there is a pullback after the euphoria wanes and the details of the merger are better understood.

If there is a pullback I’ll just buy back into the stock and if there isn’t I’ll miss out on some profit but I’ll have already tripled or quadrupled my money at that point so I really can’t complain.

 

[golfcart]

Anyone still in on BNGO by the way? I bought at $2.50 then sold around $6. I bought back in around $12 last week because I keep reading about their Saphyr system and how it could be a game changer in terms of cost. Anyone smart enough in that area to know if this tech is legit? The stock is up to $15.50 now and I’m debating if I should hold or not.

Optical Mapping - Saphyr Whole Genome Imaging | Bionano Genomics

 

[bkp_duke]

Your numbers look right except there would still be time value on the $90 call when bought back unless you wait until expiry.

Your second last paragraph isn’t clear - I think what you mean is choosing a call with a higher strike price (lower price of sale) results in a worse bear case (more potential loss) but better bull case (higher maximum profit).

Your last sentence - once the SP goes above the strike price of your covered call, it doesn’t matter how much above it goes anymore since you will have reached maximum profit. This is what you will root for!

And I look at the sale of the covered call as making the purchase of the warrants almost free (if you choose a low enough strike price for the call). When I first set this up, I bought warrants for $12.40 and sold covered calls (strike price $40) for $14.10. So I actually earned a credit. I have now rolled them out (Jan/22) and up to $60 strike price and am now at net debit of $1.30 per share, which is still really cheap for having such maximum profit ($44.70 per share) and limited loss (maybe $0.60 per share since warrants would always have some value).

It seems the only real risks here are:
1) you don't pick to sell a call that covers the bulk of the delta between the warrant price and the share price, and then the stock tanks and you lose out
2) we all barked up the wrong tree and CCIV doesn't merge with Lucid and the stock craters back to it's base of $10 (can it go below this?) and the warrant become essentially worthless

I think the best arbitrage was your original one, where you make money on the call up front that fully covers your warrant purchase, so even if things go to hell you have nearly a break-even downside.

 

[bkp_duke]

Anyone still in on BNGO by the way? I bought at $2.50 then sold around $6. I bought back in around $12 last week because I keep reading about their Saphyr system and how it could be a game changer in terms of cost. Anyone smart enough in that area to know if this tech is legit? The stock is up to $15.50 now and I’m debating if I should hold or not.

Optical Mapping - Saphyr Whole Genome Imaging | Bionano Genomics

I don't know enough about this tech to comment, although about 20 years ago I was neck deep in sequencing.

Looks like there has bee a lot of institutional investment recently:
BNGO - Bionano Genomics Inc Shareholders - CNNMoney.com

 

[juanmedina]

Wow my head hurts but I get it. When are you planning to close the CCIV trade @pz1975? I am just trying to understand the timeline and the circumstances. Thanks again for all the info as always.

Have you guys look into ACIC? another SPAC and it seems that ARK bought some.

 

[pz1975]

Wow my head hurts but I get it. When are you planning to close the CCIV trade @pz1975? I am just trying to understand the timeline and the circumstances. Thanks again for all the info as always.

I am planning to hold until after the time I can exercise the warrants and the SP is hopefully >$57.50. At that point the arbitrage gap will be closed and I can have close to maximum profit. Below maximum at that point would be from residual time value (theta) in the sold calls. If I wait until as close to their expiration date, I can maximize that profit too but will probably close earlier to avoid a possible SP drop and resulting drop in profit.

 

[ckessel]

Here's basically a zero risk CCIV warrant play. Prices based on what I see right now in thinkorswim.

Now:
Buy 100 CCIV/WS warrants for $30 each (current after hours price)
Sell 1 CCIV covered call, Jan 2022 strike $25 for $30/share
Net cost of $0 to enter this position.

On Jan 2022:
If the stock is > $25 you make (25 - 11.50) * 100 = $1350.
If the stock is < $11.50, you make nothing, but you lost nothing
(and, of course, if the stock is in between, then you make between $0 and $1350)

You just need enough margin/cash to support the covered call until Jan 2022. Not saying this is the best play as far as risk/reward, just noting the warrant gap creates a nearly risk free opportunity. I keep thinking I must have missed some hidden catch

 

[pz1975]

Here's basically a zero risk CCIV warrant play. Prices based on what I see right now in thinkorswim.

Now:
Buy 100 CCIV/WS warrants for $30 each (current after hours price)
Sell 1 CCIV covered call, Jan 2022 strike $25 for $30/share
Net cost of $0 to enter this position.

On Jan 2022:
If the stock is > $25 you make (25 - 11.50) * 100 = $1350.
If the stock is < $11.50, you make nothing, but you lost nothing
(and, of course, if the stock is in between, then you make between $0 and $1350)

You just need enough margin/cash to support the covered call until Jan 2022. Not saying this is the best play as far as risk/reward, just noting the warrant gap creates a nearly risk free opportunity. I keep thinking I must have missed some hidden catch

This is it exactly but I am targeting more potential profit. One could easily make a spreadsheet to compare max profit vs potential loss. I will be adding more tomorrow to my existing position and am targeting Jan/22 $50-60 calls. For $50 calls, $33/share maximum potential profit with $5/share max potential loss. I like those. $60 calls gives max profit $41/share vs $7/share max potential loss - also good and may have a better bid-ask spread since will likely have the most trading volume.

Note that the bid-ask spread for the calls matters since you will likely have to sell your calls near the (lower) bid number.

 

[bkp_duke]

This is it exactly but I am targeting more potential profit. One could easily make a spreadsheet to compare max profit vs potential loss. I will be adding more tomorrow to my existing position and am targeting Jan/22 $50-60 calls. For $50 calls, $33/share maximum potential profit with $5/share max potential loss. I like those. $60 calls gives max profit $41/share vs $7/share max potential loss - also good and may have a better bid-ask spread since will likely have the most trading volume.

Note that the bid-ask spread for the calls matters since you will likely have to sell your calls near the (lower) bid number.

For CCIV, I'm now seeing options up to $80 have been opened up this AM for Jul 16th 2021 and later calls. Some other positions opened up for shorter calls.

Level 4 trading approved before market opens, and the Fidelity Margin calculator now shows this as a "Convertible Hedge" trade when I put it into their system to calculate the margin requirements.


One question - with these warrants being redeemable at 30 days after merger, would it not be better to sell Aug 2021 Naked Calls, and roll it forward one month if necessary, than sell further out calls?

 

[corduroy]

I have warrants in STPK (up 40% yesterday), which have a similar discount rate (-22.8%) as CCIV warrants. Might be another setup for the CC play.

I think we need a designated SPAC thread!

 

[pz1975]

For CCIV, I'm now seeing options up to $80 have been opened up this AM for Jul 16th 2021 and later calls. Some other positions opened up for shorter calls.

Level 4 trading approved before market opens, and the Fidelity Margin calculator now shows this as a "Convertible Hedge" trade when I put it into their system to calculate the margin requirements.


One question - with these warrants being redeemable at 30 days after merger, would it not be better to sell Aug 2021 Naked Calls, and roll it forward one month if necessary, than sell further out calls?

I had Aug21 calls sold short but rolled them to Jan22 yesterday (only Aug21 were available when I did this 2 weeks ago). The warrants can only exercised the LATER of 30 days after the merger is fine or Sept 30, 2021. So that date is the earliest warrants can be exercised.

 

[ckessel]

@pz1957 What happens if the Lucid merger doesn't happen? Do the CCIV/WS end up worthless? Though, I would think CCIV would drop so much in that case the covered calls would also end up worthless, though you'd have to wait until Jan 2022 to get the full decay to $0 on them.

 

[bkp_duke]

I had Aug21 calls sold short but rolled them to Jan22 yesterday (only Aug21 were available when I did this 2 weeks ago). The warrants can only exercised the LATER of 30 days after the merger is fine or Sept 30, 2021. So that date is the earliest warrants can be exercised.

I need to go back and re-read the warrants docs. I thought it was either 30-days after a merger, or 1 year. I didn't think it was the "and" condition.

There were also some clauses in there about them being able to buy back the warrants for 0.01 with basically no notice that gave me pause.

 

[ckessel]

I put what powder I had available into the CCIV/WS piggy bank. We'll crack it open in January and see if it's worth anything.

One thing I discovered though as I was playing near the edges of my margin (not actually borrowing, just the sold calls count against margin) is that the CCIV covered calls are going to go up in margin if CCIV rises. The CCIV/WS don't act as a buffer on that as underlying stock. In addition, CCIV/WS contributes no buying power to margin, unlike normal stocks.

That means I could face a margin call if CCIV goes bonkers while I'm unable to exercise the warrants. So, beware on that, leave yourself room for margin expansion on the CCIV covered calls.

 

[pz1975]

I put what powder I had available into the CCIV/WS piggy bank. We'll crack it open in January and see if it's worth anything.

One thing I discovered though as I was playing near the edges of my margin (not actually borrowing, just the sold calls count against margin) is that the CCIV covered calls are going to go up in margin if CCIV rises. The CCIV/WS don't act as a buffer on that as underlying stock. In addition, CCIV/WS contributes no buying power to margin, unlike normal stocks.

That means I could face a margin call if CCIV goes bonkers while I'm unable to exercise the warrants. So, beware on that, leave yourself room for margin expansion on the CCIV covered calls.

Yes make sure you have enough margin to allow for the CCIV calls to go deeper in the red if CCIV keeps going up. Need a buffer.

 

[pz1975]

I need to go back and re-read the warrants docs. I thought it was either 30-days after a merger, or 1 year. I didn't think it was the "and" condition.

There were also some clauses in there about them being able to buy back the warrants for 0.01 with basically no notice that gave me pause.

I don’t have it in front of me now but the conditions I wrote were “or” not “and” as I wrote in my post. So the earliest the warrants can be exercised is Sept 30, 2021 and the latest is 30 days after the merger is completed (if that is after Aug 31, 2021).

 

[pz1975]

@pz1957 What happens if the Lucid merger doesn't happen? Do the CCIV/WS end up worthless? Though, I would think CCIV would drop so much in that case the covered calls would also end up worthless, though you'd have to wait until Jan 2022 to get the full decay to $0 on them.

CCIV could just go back to $10. I don’t see how it would be worthless since it still has the unused cash. $10 should be the floor. In that case the warrants would drop but would still have some value, maybe $0.75-1.00. And yes the sold calls would lose most of their value too and could be closed out before expiration for cheap if one didn’t want to hold the margin anymore.

 

[pz1975]

I don’t have it in front of me now but the conditions I wrote were “or” not “and” as I wrote in my post. So the earliest the warrants can be exercised is Sept 30, 2021 and the latest is 30 days after the merger is completed (if that is after Aug 31, 2021).

I found the document - revised recently it looks like. It says later of August 3, 2021 or 30 days after merger completion. When I first researched this it implied Sept 30, 2021 (it said 1 year after offering which I found to be Sept 30, 2020 but it must have meant 1 year after announcement or filing or something). Anyways, that does make the Aug 20 calls more attractive if the merger is done by July 20.

https://fintel.io/doc/sec-churchill-capital-corp-iv-sc-13g-2021-february-16-18674-661
Page 6, 2nd paragraph