This is the fourth (and hopefully final!) piece I'm writing on PSTH. It should be read in conjunction with yesterday's "framing the opportunity" piece; however, my two prior posts (December's curios case of PSTH options and early Feb's implied vol / SPACsanity) are worth revisiting as well.
Why am I spending so much time and brain power on PSTH? Because I love to provide the disclosure that nothing on this site is investing advice, and options are very risky so please do your own work..... but also because I think the options chain reflects some very strange things and there is a lot of potential opportunity for event investors who structure the trade properly.
Anyway, today I want to do some scenario analysis for PSTH because I think it helps inform both why these trades are so interesting and how the super high implied volatility at PSTH can create really interest risk/rewards and isolate specific event bets.
Let me start be giving an example trade which might be my current favorite trade. As I write this (after market close Tuesday, Feb. 23), PSTH last traded for $29.31. The June $35 calls options last traded for $4.75, so if you buy the stock and sell those calls you're create the stock for ~$24.55. I think that's incredibly attractive. Why?
Anyway, that's my favorite trade for PSTH right now, but there are plenty of others interesting trades that can isolate a variety of variables. Again, all of this is possible because PSTH is such a unique beast: a cash shell searching for a deal that has multiple options embedded into it (from the tontine warrants on the upside and from the redemption put on the downside).
The three main variables to consider when constructing a PSTH trade are
There are probably other variables, but I think those are the main three. And they are all somewhat intertwined.
For example, consider a market crash. Let's say we have some type of crazy event that causes the market to instantly crash 30%. How does that affect PSTH?
Well, it really depends on the timing. If PSTH announces a deal tmr and this huge crash occurs in three or four months right as the deal is wrapping up, PSTH probably drops like a rock.
But what if the crash happened tomorrow? PSTH would probably trade closer towards trust value.... but they might end up getting a better deal on whatever company they buy. In fact, if we had world in crisis / semi-crisis scenario that likely goes along with a 30% crash, PSTH might be tempted to reach out to a bunch of companies that had already rejected them and see if they were interested in revisiting a merger that would give them access to up to $7B in cash. So, for example, Bloomberg apparently rejected PSTH last year; maybe a real stressed scenario makes them revisit the offer.
Of course, that crash could cause a PSTH deal to take even longer. Let's say Ackman is currently in decently late talks to merge with some company, and they are targeting an early March signing date, and this hypothetical crash happens tomorrow (Feb. 24). Ackman might want to recut the deal to a lower valuation to reflect a stressed market. Or he might look at the stressed market and say "some of those targets that turned me down are available now" (a la the Bloomberg example above). Either of those would extend the timeline for PSTH announcing a merger (and thus a merger closing).
So yeah, a market crash would effect PSTH. But how it would effect PSTH would vary wildly depending on where PSTH is in their deal process. And because the market crash could alter when PSTH announces / concludes a deal, depending on which PSTH options we're talking about a market crash could actually be hugely beneficial for the options. For example, consider selling the September $20 puts (currently trading for ~$1.40/share). If PSTH announced a deal tomorrow, closed in June, and then the market crashed in July, that would be awful for those puts. The $20 redemption put goes away once the deal closes, so that stock would be trading on its own fundamental value. I think it would take a really large market crash for PSTH to go below trust value even post deal, but it could happen and this is about the worst case scenario for those puts. Alternatively, if PSTH hasn't announced a deal and the market crashes in the middle of next month, it's a bonanza for those puts, because, assuming PSTH will be going back to any targets to ask for valuation cuts or maybe circling back with old targets, that crash extends the timeline to closing a deal, which means it's dramatically less likely PSTH could close a deal (and thus lose the redemption puts) before the September puts expire.
Anyway, those are the things to keep in mind when thinking through different options trades. And, assuming you are keeping those in mind, I want to talk through some different possible scenarios and the best ways to play them.
Early, I mentioned I like buywriting the June $35 calls, and I mention some of the reasons for it. Let me give you some of my theories / thoughts on PSTH, and why I think the buywrite sets up well for them.
Anyway, that's why I like the trade the way I set it up. While I'm here, let me provide a few more hypothetical trades (which are not investing advice!) that might fit a few other theories one could have on PSTH. Note that a core element of all of these trades are safety; if you're an experienced options trader, I do think there are some interesting set ups that could be made with put spreads or call spreads, but intellectually I just prefer playing around with ways to get access to the stock while maintaining the optinality of the redemption put value
Anyway, this has been a very different post/series than I normally do; it felt a little strange to write to be honest. Bottom line: PSTH is a cash shell trading at a 50% premium; that seems pretty crazy, but given the unique tontine structure and the huge implied volatility, I think there are ways to play PSTH that brings your cost basis closer to trust value and exposes you to significant potential upside if/when a deal is announced (and assuming the market likes it, which I think it will).
Three other things before I wrap up:
First, I saw two above market PIPEs yesterday (Lucid was the second); these are the first above markets PIPEs I'm aware of. Ackman is a skilled negotiator; so while I don't think PSTH will need a PIPE attached to its deal (given its size + forward purchase agreement) if they do I wouldn't be surprised if the PIPE was an above market deal. If that happened, it would be generally good for anyone who had sold optionality (an above market PIPE deleverages the company and should reduce volatility).
Second, and related to the above market PIPE, here's a curious thought: PSH has a $3B forward commitment to invest into PSTH at trust value. Could they monetize that commitment? I.e. could they just sell $1b of their forward commitment to someone for a premium ("give us $250m for the right to buy $1B of PSTH at trust; with PSTH trading at $30 and likely to go up on deal announcement, you're already in the money by $250m!). It'd be really interesting if we started to see sponsors monetize their forward commitment.
Third, CCIV's stock got hammered after announcing their Lucid deal last night. I found the commentary around the stock drop really curious: yes, CCIV fell from ~$60/share to ~$35/share, but people were treating it like the merger was a huge failure. It seems like a pretty classic case of buy the rumor, sell the news combined with some speculative excess. I mean, $35/share is 3.5x trust value and one of the best returns for a SPAC ever. The stock started the year at $10/share; if I had told you that they would be priced at $35/share the day after announcing a deal you probably wouldn't have believed me at the start of the year! Still, speculative manias can pop for strange reasons, and seeing the most hyped SPAC deal drop almost 50% on announcement is as good a reason for a bubble to pop as any.
Ok, that's it for PSTH. Again, the series was a little different than I normally write about, but I just don't think a lot of people have thought through all of the angles of this deal and how there is potential alpha in the unique structure. I'm hugely bullish on the opportunity here, and I'm looking forward to writing an update after they announce a deal (hopefully in late June, after the bulk of my options have expired!).
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