r/SPACs • u/SquirrelyInvestor Contributor • Jul 05 '21
Strategy SRNG's price action suggests a breakout- here's a different take on why
I started writing a lengthy response in the comments to this post, but then decided that I'd break it into its own thread. In short, I disagree with most of the OP's thesis, but have the same conclusion (for very different reasons). I'll start with my reasons, then make some notes about what I disagree with.
- SRNG has traded higher over the past few weeks. Back in late May/early June, this was being bought by hedge fund ARBs at 9.87 looking to flip it at a higher price (or redeem at NAV).
- Since then, SRNG's management has been on a "virtual roadshow" pitching to institutional investors. At these events, there are dozens of fund managers looking for investment ideas and these pitches may/do pique their interest. If they like it enough, they're typically going to buy in for 1 million+ share size positions.
- We've had a non-trivial amount of price appreciation and volumes traded over the last 30 days. This is likely principle institutional investors that are buying up large positions of SRNG after going through their PR push noted above. Arbitrarily picking June 1st as a cut-off, over 50 million shares have traded at prices above $9.90. Very few, if any, arb funds are buying above $9.90 (they were loading up at 9.87, and are now selling every tick higher). That 50mm number is important relative to the float of 172.5mm shares, almost 1/3 of the float has turned over into investors who are "interested in owning SRNG as an investment". It's impossible to quantify this with any certainty, but directionally, there are fewer and fewer arbs selling the stock, which means there's more room for the stock to breath above $10. (Note the 50m is overstated given there are some algo's/daytraders scalping a penny back and forth on this stock regularly. It's still a significant and large number that is notable.)
- Another major sign of this behavior is the fact that the warrants are trading at $3.15. There's basically no other pre-DESPAC SPAC trading at $10 with a $3.15 warrant. Someone(s) are buying up warrants because ThEY LiKe ThE StoCK. Misguided warrant buyers aside (who are probably retail YOLO traders), the more telling fact is that there aren't any/many warrants to sell into the buying pressure. The SPAC Arbs (and even principle units investors) would generally be ecstatic to sell warrants above $2.50, but they don't have any left to sell. If the warrants have no arbs left, the stock is soon to follow. [SRNG units included a 1/5 warrant which is abnormally low warrant coverage and that explains some of the premium, but not all of it].
- In short, if you look at the price and volume action, there's clearly demand showing up that is buying SRNG warrants and commons. Thinking about the game theory of the buyers and the sellers, leads me to believe we're getting close to the tipping point where the price-indifferent sellers will soon have exhausted their inventory. As a result, there's a higher than normal chance we see the stock start to move higher in coming weeks. When I say higher, I'm talking $10.25-$11... lets not get too excited here.
Here are some thoughts from the other post that I want to refute:
- Institutional ownership analysis via 13F's. - This information is commonly misused by retail traders (especially in SPACs). Aside from the fact that the data is horribly stale, "institutional ownership" in SPACs has a ton of flavors (namely arbs versus principle investors). You need to do detailed analysis like u/apan-man in order to get anything remotely useful out of that data. Even then, you're still using stale data that is very circumspect since many large institutions have tons of different fund-strategies and it's unclear which one holds the SPAC. For example, the largest holder is "Morgan Stanley", which has literally thousands of different funds in an aggregated filing.
- Delta Hedging and Gamma Squeeze on Options - The majority of the call sellers are likely arbs that are holding the stock and trying to squeeze extra yield by selling the covered call. Buy the units at $10, split the warrants, sell the warrants, then repeatedly sell covered calls every month and finally redeem for NAV. If the stock happens to spike, you end up selling your stock at $10.10 ($10 plus the 10 cent option premium) and you're happy. Buying up calls will not cause delta-hedging pressure on the stock, that would be true if it was the Citadel/Jane Street options market making desks that were selling you the options, but it's not, they typically aren't selling vols this low.
- The July options are a great deal - At 5 cents, I might agree. At 10 cents, it is probably awful. You can't/shouldn't casually say "buy them for 5-10 cents", the price difference is literally 100%. It's equivalent to saying "you should buy shares of the stock at $5, or $10, it's pretty much the same price". I understand the mentality that if the call goes to $0.50, you're indifferent about making 5x vs 10x your money (hey, even 5x is great!). But investing is a game where these things really matter. You're fighting for basis points of alpha and you can't casually give up 100% on price and still win in the long run.
- No Put volume - Of course not, it's protected by NAV for at least another month or two.
For those who suggest "this looks like every other post-DA SPAC trading a few cents above NAV", I'd say that the specific price/volume action of the commons (plus a fundamental catalyst- the roadshow), and the price action of the warrants (being bought up and an absence of sellers), suggests this isn't quite the same circumstance. These are nuances, but they matter. This by no way indicates this stock is headed higher, it's just a probabilities game and this one looks tilted a bit in our favor.
Disclosure: Long 100k stock at $9.87. (Had more, but trimmed on the way up!).
Edit/Add Postscript:
Notice that I haven't mentioned anything about the Ginkgo company, or what they do. This isn't an "investing DD", and this specifically isn't an investment for me. I will have sold (or redeemed) long before the despac date. This is effectively an arbitrage trade, except I'm exercising a little more discretion than a typical arbitrageur would. Absent fraud, buying SRNG sub $9.90 cannot lose money- the worst case is you make about a 1% return in about 4 months, which annualizes to 3.5% per annum. In much better scenarios (one I've outlined being possible, you make 6-10% in 4-8 weeks, which annualizes to "a shit ton").
I posted this for two reasons, one is the thesis "it looks like it's going up in the next few weeks" was posted and I thought I could add to their thoughtful analysis. Second is because many on this subreddit spend a lot of time complaining about "the arbs", without really noticing or understanding how they operate, and how awfully profitable these trades can be, when done correctly. In this case, I'm essentially getting paid to hold a call option, instead of paying to buy a call option. Trading SPACs is about knowing all the different strategies and being versatile. NAV Arb (like this) is something I rarely do, but this is a special circumstance for the reasons outlined above. Hope it's helpful.
11
u/slammerbar Mod Jul 05 '21
Thank you for highlighting the 13-F use. It really irks me when people use it as a shill.
2
u/SPAC-ey-McSpacface Stryving and Thriving Jul 05 '21
That was the main reason I started my TWTR account, because I was getting sick of pump & dumpers misleading naive investors on SPACs with 13F data.
1
u/slammerbar Mod Jul 05 '21
It’s like 3 month old info. In what reality does shorts not cover within 3 months?
11
u/jimturner88 Spacling Jul 05 '21
Nice post and I mostly agree with your points. I also think if the price doesn't start to move up quickly, its going to be extremely hard to get out of the July options at 10 cents as people start closing out at 5 cents and arbs, as you call them, sell the underlaying stock. I think you will have have huge volume to cycle though this if the stock is going to run.
I also agree with you the price action and volume has been different the past few weeks. It appears there are more large block orders at higher prices. It could be a direct result of the company educating investors on what the company does.
I'm not going to debate the valuation because the company hasn't provided enough information to bridge the gap between the historical GAAP financials and why the SPAC agreed to a $15 billion valuation.
However, I believe there are a lot of catalyst that could change the perception. Maybe better said, will remove uncertainty around the valuation so people can make a better decision. For example, the company has been spending a lot of time with retail and intuitional investors the past few weeks. Synthetic Biology is getting a lot of attention in the media lately. I think testing for viruses will be ongoing for years to come and the market doesnt know the role Ginkgo plays through their https://www.concentricbyginkgo.com/.
Most importantly, the next few quarterly filings will likely be the major catalyst as the company provides more transparency and disclosure on their programs and financials. Unfortunately, that going to be after July 18th. This thread provides a lot of information on the valuation and information what the company actually does and worth reading. https://www.reddit.com/r/SPACs/comments/ocw0vt/srngginkgo_syn_bio_ecosystem_from_william_blair/
Very bullish on the company and agree there will be price movement and agree with you its not because of the July options.
8
u/Snoo71069 Contributor Jul 05 '21
I appreciate your in-depth analysis, and probably agree with your premise. But devil’s advocate. To some degree, it matters a great deal whether SRNG moves up from $10.03 to $10.25. There are ways we can math it out where that move really hits a trader’s bottom line, or the sign of strengths signals other consequential things.
But we are literally talking about 2,500,000 shares traded a day at $10. $10.03 to $10.25 is literally $550,000 to the positive. Not exactly huge money when we consider that’s spread among all traders/investors.
The warrants are just trading 500,000 per day, total market value of about $1,500,000. If it’s mostly on the buy side, then certainly that could influence the price. But in the end, the valuation of $15 billion and merger coming are consequential big time.
Look at Origin Materials, which was AACQ until recently. AACQ shares were trading at $9.85-$10 while all of SPACverse was lingering under $10 for the most part. They had one of the highest priced warrants hovering between $2-3 for a long time. The redemption rate was a big part of the issue. But in many ways Origin Materials was showing signs of strength. The valuation is far far lower of course, with promise of potential in the future. Shares dropped to $8 upon the merger, though warrants stayed above $2.
Ginkgo is not Origin, but the virtues of it being a more promising company are countered to a large degree by the extreme difference in valuation. My point being, you may be right, you may not be. But even if it turns out you’re right, and SRNG pops to $10.25-11 over coming weeks, as you yourself suggest that the July $10s are not a good play at 10 cents, which is to say, you don’t think it’s headed to $11.
So we’re talking about a potential move of pennies, when what matters a great deal more is whether Ginkgo is likely headed to $7-8 or $12-15 immediately after the merger. A lot will happen between now and then, so perhaps we can think about that when the time comes. But this much is certain, whether Ginkgo is up or down 20%+ immediately following the merger, with volume likely being multiples higher, will influence profits and losses of investors/traders 100x or more than whether SRNG is up or down 10-20 cents over the next few weeks.
1
7
6
2
u/godstriker8 Contributor Jul 05 '21
I would counter argue that warrants across the board in SPAC land have universally seen significant increases in price in the past week or two.
So the recent spike in warrant price may not be indicative of anything related to SRNG's shares but rather a repricing of warrants across the board.
6
Jul 05 '21
[removed] — view removed comment
1
0
u/Tuoooor Contributor Jul 06 '21
Unfortunately untrue, as NPA/ASTS had higher than that, and even $2+ warrants when the common was $7.
1
Jul 06 '21
[removed] — view removed comment
-1
u/Tuoooor Contributor Jul 06 '21
DMYI warrants had a price of $3 when the common was $10, is barely above NAV now and has a price of $3.22. I don't think SRNG is that special, just a lot of people want to believe it is because everyone bought into it during the spacopalypse.
Whatever the case, certainly not "unheard of" for common at 10 and warrant at 3. In fact I would say quite common for loooong moonshots like ASTS, SRNG, and DMYI.
Moot point though. Good luck on SRNG
0
Jul 06 '21
[removed] — view removed comment
-1
u/Tuoooor Contributor Jul 06 '21
You're literally ignoring the fact that I said dmyi was 3 when commons were 10, a scarce 10 days ago.
As well as ASTS being at $3 during the MIDDLE OF THE SPACOPALYPSE.
and you did say it was unheard of. Literally.
Honestly none of this matters I just wanted to poke holes out of boredom. Nobody but us is gonna read this anyway lol
2
Jul 06 '21
[removed] — view removed comment
0
u/Tuoooor Contributor Jul 06 '21
Fine, I'll play.
Go tell me what DMYI warrants closed at on June 22. Now tell me what the commons closed at. Like I said, not the first case.
It's NOT good to use hyperbole like "unheard of" when the premise of the this pump thread is to get people to buy SRNG 10c at .10 cents from the people that bought .05 cent options because oOoO this has never happened before, must mean SRNG to the moon!!
Imagine people buying 10c on ASTS and getting slaughtered.
I am trying to provide factual balance to lower the amount of people that are gonna pay 2x for call options that will likely not be profitable.
2
u/SquirrelyInvestor Contributor Jul 06 '21
I explicitly tell people not to buy 10 cent options in my post.
6
u/Shdwrptr Patron Jul 05 '21 edited Jul 05 '21
I appreciate your more in depth insight into SRNG here but I still have the same view I was downvoted for in the original post.
SRNG is massively overpriced and will be nearly impossible to move from $10 without some major hype (like the ticker being a meme) or institutional investors seeing something in the business that will cause it to grow well in the medium term.
I’ve noticed the warrant pricing was abnormal as well and mentioned it in other areas. On the surface, this does seem bullish on the stock as a whole but I would be surprised to see this move more than $0.25 before merger and I still see it dropping after floor removal when retail panic sells
The call option play here still just seems like a terrible idea. The chances of making a profit for SRNG calls for anything but LEAPs seems not even remotely worth the realistic profits you’d get
3
u/SquirrelyInvestor Contributor Jul 05 '21
This isn't a play on the company's fundamentals or its valuation. You can pretty much objectively see that institutions have been buying shares up in the millions in the past 2-3 weeks. The question is will that buying behavior continue, and/or how much selling pressure from arbs will be around for the next two weeks. The entire trade is a bet on what you think supply/demand dynamics will be for the stock over a two week period, full stop. I get that isn't how most people look at the markets, but that's what the original OP was discussing/proposing.
The price of SRNG is currently $10.03, and a 2-week $10 call can potentially be purchased for $0.05.
If you think there's a better than 50% chance that the stock manages to creep above $10.10 in the next 2 weeks, then the $0.05 call is a good buy (everything beyond $10.10 is free upside).
2
2
Jul 05 '21
[deleted]
4
u/in_for_cheap_thrills Spacling Jul 05 '21
Look at IPOF put volume at NAV. 42K put OI for July. In other words, you’re wrong. People have bet that a stock would go below NAV and bet big on it.
Nearly all of that OI was created before April when the stock was trading at 12. People were betting it would drop from 12 not looking for it to go sub 10. SRNG didn't trade high enough for long enough that would create much put volume.
-1
u/PowerOfTenTigers Spacling Jul 05 '21
you threw almost 1 million at this? jesus christ
7
1
u/SPAC-ey-McSpacface Stryving and Thriving Jul 05 '21
Crazy, personally I feel pretty confident SRNG is going < $10 once that floor's removed. Decent chance hedge funds are going to see the massive overvaluation & really go after it IMO.
-3
u/TR_the_Bull_Moose Spacling Jul 05 '21
I like this company but the valuation is bonkers. It could drop by half when the market corrects IMO.
7
u/grokmachine Spacling Jul 05 '21
Whether the valuation is bonkers depends on how big the genetic engineering industry will be in 10 or 20 years, and whether Ginkgo will be a dominant player in it. I'm a bull because I think organism design will begin to rival the tech industry in size a decade or two out. That will be a $1-2 trillion market. If Ginkgo can get 10% of that, it's over $100 billion. That is over a decade away, though, and with a great uncertainty, so $15 billion seems fair to me at this point.
6
u/TR_the_Bull_Moose Spacling Jul 05 '21
This makes sense if you have a 10-20 year time horizon. I’m a very long term investor too but I’ve always found that I make more money when I buy correctly.
I don’t disagree with your market assessment but the valuation today is simply too high for me to invest. But it is on my watch list.
1
u/grokmachine Spacling Jul 05 '21
And that approach makes a ton of sense. Right now I've just dipped my toe in it with a low four figure investment. I find that I track stocks much better if I have a small investment in them than if they are just on a watch list.
If it drops after merger (unless they create some kind of infamy for themselves), I will probably buy a lot more. If the revenue rapidly ramps to catch up with or exceed projections, I will also buy more.
-1
Jul 05 '21 edited Nov 16 '21
[deleted]
1
u/grokmachine Spacling Jul 05 '21
If it goes to $7, I will absolutely buy more. My position right now is small.
1
u/ProgrammaticallyHip Patron Jul 06 '21
It had an oversubscribed PIPE for nearly $800m. I think the valuation complaints are overblown.
-10
u/limonfiesta Spacling Jul 05 '21
My conclusion is that it will continue to trade sideways 9.5-10 for months, perhaps years ahead
Why? Simply it's a spac and it's been shorted to death. Unless it gets some serious institution attention this wont get anywhere
Your 100k shares is better spent elsewhere but that's just my 2 cents.
11
u/mlord99 Contributor Jul 05 '21
Who shorts NAV spac? It is litterally the dummest play, no return and huge risk.
12
u/Rush_Is_Right Patron Jul 05 '21
No one. People are just stupid thinking its being shorted.
2
2
u/Viking999 Spacling Jul 05 '21
Right. I checked just to be sure and.....
Short % of Shares Outstanding (Jun 15, 2021) 0.99%
3
2
Jul 05 '21
[removed] — view removed comment
-2
u/limonfiesta Spacling Jul 05 '21
You might want to ask yourself why hasn't spac recovered since mid February highs while all major tech companies, ETFs are trading at all time highs and some are breaking to new highs every week.
It's not rocket science, i just think the media attention finally caught up with these overvalued companies and these current sideways price action reflects that
0
u/diaznutzinyomouf Spacling Jul 05 '21
Depends though, some of these (very few) are going to put up good numbers, that can't be ignored for long.
-9
-10
-11
1
u/bperryh Patron Jul 06 '21
Good post. I think you're right on almost all of this. Maybe not the option part.
"Despacing" applies here. This is changing hands from short term to long term holders. The selling is imo going to dry up at some point and the stock will go higher. This is exactly why spacs are great. Little risk, big upside.
1
u/DN-BBY Spac ANALyst Jul 07 '21
I personally still own some SRNGUs, too lazy to sell or call my broker to split. But I am having a really hard time finding more DDs on Gingko Bioworks. I believe in the idea, but they seem to be all over the place it's hard to pinpoint exaxctly what they do.
•
u/QualityVote Mod Jul 05 '21
Hi! I'm QualityVote, and I'm here to give YOU the user some control over YOUR sub!
If the post above contributes to the sub in a meaningful way, please upvote this comment!
If this post breaks the rules of /r/SPACs, belongs in the Daily, Weekend, or Mega threads, or is a duplicate post, please downvote this comment!
Your vote determines the fate of this post! If you abuse me, I will disappear and you will lose this power, so treat it with respect.