4 ms·

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.

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

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