8 ms·

People loved Nikola but not its warrants

77 points by kgwgk 6y ago

jluxenberg 6y 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-signup?source=msweb http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s...
- matthewmcg 6y ago
  And then use an email-to-RSS service to get the full columns in your newsreader...
klenwell 6y 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.
- beervirus 6y 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 6y ago
  You could (short) sell the stock at the same time you buy the warrants.
  - CPLX 6y ago
    Not really. He covers that in the article.
  - beervirus 6y ago
    That probably occurred to the author who used to work at Goldman.
  - oh_sigh 6y ago
    Here's an interesting article that explains why that wouldn't work here: https://www.bloomberg.com/opinion/articles/2020-07-21/people-loved-nikola-but-not-its-warrants https://www.bloomberg.com/opinion/articles/2020-07-21/people...
    - frandroid 6y ago
      underrated reply
  - fny 6y ago
    You can't directly short them because of the borrowing fees, but you could create a synthetic short with options.
- aeious 6y 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
ballenf 6y 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 6y 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 6y 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 6y ago
    *NKLA
- necubi 6y 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 6y ago
JumpCrisscross 6y 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
smabie 6y 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.
- ballenf 6y 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.
  - beerandt 6y 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.
    - wahern 6y ago
      That reminds me of the story of the economist and the $20 bill.
    - mifreewil 6y ago
      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.
      - smabie 6y ago
        You could just keep it and sell it in the future without renting it out. Or you could flip it I guess.
nickik 6y 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 6y 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 6y 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.
gutino 6y 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.

77 points by kgwgk 6y 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-signup?source=msweb http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s...

matthewmcg 6y ago
And then use an email-to-RSS service to get the full columns in your newsreader...

klenwell 6y 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.

beervirus 6y 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 6y ago
You could (short) sell the stock at the same time you buy the warrants.
- CPLX 6y ago
  Not really. He covers that in the article.
- beervirus 6y ago
  That probably occurred to the author who used to work at Goldman.
- oh_sigh 6y ago
  Here's an interesting article that explains why that wouldn't work here: https://www.bloomberg.com/opinion/articles/2020-07-21/people-loved-nikola-but-not-its-warrants https://www.bloomberg.com/opinion/articles/2020-07-21/people...
  - frandroid 6y ago
    underrated reply
- fny 6y ago
  You can't directly short them because of the borrowing fees, but you could create a synthetic short with options.
aeious 6y 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

ballenf 6y 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 6y 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 6y 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 6y ago
  *NKLA
necubi 6y 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 6y ago

JumpCrisscross 6y 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

smabie 6y 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.

ballenf 6y 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.
- beerandt 6y 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.
  - wahern 6y ago
    That reminds me of the story of the economist and the $20 bill.
  - mifreewil 6y ago
    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.
    - smabie 6y ago
      You could just keep it and sell it in the future without renting it out. Or you could flip it I guess.

nickik 6y 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 6y 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 6y 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.

gutino 6y 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.