
People loved Nikola but not its warrants - kgwgk
https://www.bloomberg.com/opinion/articles/2020-07-21/people-loved-nikola-but-not-its-warrants
======
jluxenberg
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-s...](http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-
signup?source=msweb)

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

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klenwell
_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.

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mpalczewski
You could (short) sell the stock at the same time you buy the warrants.

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oh_sigh
Here's an interesting article that explains why that wouldn't work here:
[https://www.bloomberg.com/opinion/articles/2020-07-21/people...](https://www.bloomberg.com/opinion/articles/2020-07-21/people-
loved-nikola-but-not-its-warrants)

~~~
frandroid
underrated reply

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smabie
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
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
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.

~~~
mifreewil
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.

~~~
beerandt
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.

~~~
gowld
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.

~~~
beerandt
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.

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nickik
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.

~~~
AnthonyMouse
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.

~~~
llsf
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.

~~~
totalZero
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.

~~~
llsf
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...

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ballenf
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.

~~~
necubi
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
Why is a company without a revenue stream even listed on a stock market?

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Jtsummers
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.

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duskwuff
"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...](https://en.wikipedia.org/wiki/Special-
purpose_acquisition_company)

~~~
gowld
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.

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JumpCrisscross
> _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_

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gutino
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.

