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re: Special Purpose Acquisition Company (SPAC) Discussion
Posted on 6/27/20 at 12:36 pm to LSUregit
Posted on 6/27/20 at 12:36 pm to LSUregit
Talk to me here. There seems like an arbitrage opportunity on some of these SPACs, but I’ve never split units, so I don’t know how much work it is and if that work is worth it.
Say a unit is priced at 10.30, the share is priced at 10.10, and the warrant is priced at .70
That’s a .50 difference in the unit value and the implied share+warrant value. Assuming you purchase 2000 units, split them, then sell the shares and warrants, that’s a 5% return— plus or minus 2% with potential volatility.
This may not be worth the effort, but if a spread could yield a 10+% arbitrage return, it may be worth the effort and risk.
Say a unit is priced at 10.30, the share is priced at 10.10, and the warrant is priced at .70
That’s a .50 difference in the unit value and the implied share+warrant value. Assuming you purchase 2000 units, split them, then sell the shares and warrants, that’s a 5% return— plus or minus 2% with potential volatility.
This may not be worth the effort, but if a spread could yield a 10+% arbitrage return, it may be worth the effort and risk.
3
Posted on 6/27/20 at 1:01 pm to TheChosenOne
Yeah, my understanding is that there are firms that take advantage of that arbitrage.
Posted on 6/27/20 at 8:50 pm to TheChosenOne
When NKLA was approaching $90, I was able to rack up on NKLAW for $28. On July 3rd, I can pay $11.50 to turn the warrants into shares. It seemed too good to be true. We'll see how it shakes out, though.
This post was edited on 6/27/20 at 9:26 pm
Posted on 6/27/20 at 11:22 pm to TheChosenOne
Not all perceived violation of parity is glitter and gold.
Your scenario sounds good in theory but there are way too many variables. Initially, most SPACs will trade as units. Those units may be comprised of one share of common stock and warrant, but that may be 1, 1/2, 1/3 of a warrant, and that warrant may be redeemable for full or only 1/10, 1/2, 3/4 or such fraction of common.
Even if all are equal 1:1, The units, commons, warrants and rights all trades individually at any given minute with much volatility. That's not even taking into account the stock's significant disparity down the road due to maturation, cycle, implied risk, hype, market reaction, fair/intrinsic time value, leverage of warrants and the fact that they're not even exercisable, then cash, cashless etc.etc.
Some brokers can split the units into common stock and warrants when available prior to merger but, depending on the stock and amount of shares, they may charge a fee negating your arbitrage opportunity example. The low risk/high reward arbitrage is parking shares at net asset value as I mentioned earlier.
Your scenario sounds good in theory but there are way too many variables. Initially, most SPACs will trade as units. Those units may be comprised of one share of common stock and warrant, but that may be 1, 1/2, 1/3 of a warrant, and that warrant may be redeemable for full or only 1/10, 1/2, 3/4 or such fraction of common.
Even if all are equal 1:1, The units, commons, warrants and rights all trades individually at any given minute with much volatility. That's not even taking into account the stock's significant disparity down the road due to maturation, cycle, implied risk, hype, market reaction, fair/intrinsic time value, leverage of warrants and the fact that they're not even exercisable, then cash, cashless etc.etc.
Some brokers can split the units into common stock and warrants when available prior to merger but, depending on the stock and amount of shares, they may charge a fee negating your arbitrage opportunity example. The low risk/high reward arbitrage is parking shares at net asset value as I mentioned earlier.
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