Two points on what you migh tbe missing - 2nd one more relevant.
1) The "turnout adjusted number of shares" you`re writing about are misleading since as far as I understand, a failure to show up i scounted as a "no". That`s the reason AMC can`t get even simply things approved any more - too many retail investors that don`t turn out to vote, irrespective of the topic. But this shouldn`t change the expected outcome of an approval.
2) ...and this might get weird now. A key part of your thesis is that you somehow can short AMC with reasonable risk, and you described how to do that via put options. However, this makes the assumption that the strike price does not get adjusted. But: Some significant corporate event can lead the OCC to adjust the option contract in order to guarantee smooth trading, e.g. through adjusting the strike price. One of the coporate actions that can lead to that sort of adjustments are stock splits (see e.g. https://www.fidelity.com/learning-center/investment-products/options/contract-adjustments) Yes, I know, technically the split has already happened through the introduction of APEs. But to be sure, I think one would have to wait until AMC officialyl declares the date of the vote (then they need to inform the OCC), and close to the annoucnement of that date. the OCC would publish a memo (https://infomemo.theocc.com/infomemo/search) on changes in the options contract, if there are any.
Obviously, I might be totally off with this point, let`s see what you think.
Yes the options will get adjusted (less shares, higher strike) because of the reverse split - but what is the issue with that? Your stock+put position will still net-off
In my eyes *both* lead to changes in the underlying options contract, but only i) has the consequence that the downside is not the +2.5% described by Andrew, but actually leads to a loss in a downside scenario. Part ii) does not affect the trade as you write.
I`m curious to see and learn about this, therefore here are more details - would be grateful to hear from someone more sophisticated than me what you think:
For simplicity, I will use the prices as they were when the artivle was written. I`ll also assume that we still have one APE per one AMC share, i.e. effectively a 2-for-1 split. Yes, it`s more APE shares now becuase of their ATM action - but the same logic still holds with more APEs.
Buy 100 APEs at ~1.9$, and 1 put option contract (that gives you the right for selling 100 APCs at 4$ each) for 200$ premium, 4$ strike.
Effect of i): The 2-for-1 split leads to the strike prices adjusted downwards to 2$ (4$ divided by split ratio). So you now spent 390$ for the 100 shares + put contract - but it`s not worth 400$ any more, becuase the strike has been adjusted. To make use of the put, the price of one AMC would have to fall below 2$.
Note also: Your contract is now good for 200 AMCs becuase the contract multiplier gets adjusted as well, but this won`t change the calculation above.
But will the OCC really adapt the strike for a stock split that technically has already happened?? I don`t know - and this is what I had meant above.
As you wrote correctly, the reverse split doesn`t change the scenario: Effect of ii) new strike price: 20$ (2$*10, assuming i) holds), contract now covers right to sell 20 shares of AMCnew. You now hold 10 shares of AMCnew plus the contract with strike 20$ for which you paid 390$. In the absolutely worst case, you now would exercise this put which would give you 200$, which would lead to a loss of 190$ on the 390$ you spent.
So in summary, the crucial point is: does i) lead to adjustments or not...?
Again: I might be totally off with this point, let`s see what you think.
This is not correct - the options will adjust properly to reflect the exchange ratio and the split. Ultimately instead of delivering 100 AMC shares vs. receiving $400, you would deliver 10 shares of post split AMC vs. $400 - the OCC adjustment will ensure that you deliver whatever the adjusted underlying security is vs. the same cash amount (no impact on economics).
That said, there is certainly risk to the trade - just don't think it's related to the options contract adjustment.
This is only true if you solely consider the reverse split (ie part ii) above). If I) is considered, you don’t get the 10 shares at 40usd but 20 shares at 20usd strike.
So you also seem to assume that the occ does not take the split into account - what makes you so sure about that?
All the exchange ratios I used are the right ones as per the exchange offer.
Yes. @sck400 you have the right instinct to double/triple check everything, especially when it relates to options, but I invite you to check historical adjustements for corp actions/share class conversions on the occ website: https://infomemo.theocc.com/infomemo/search
what we missed is that Antara can hedge their position on swap (they only have to keep the voting rights). Your post nicely points out how cheap they got their shares, and thus, how incentivized they are to just lock in their multi-bagger.
today's price action basically proves (to me, at least) that they're hedging. I had thought the overhang of the ATM was lifted, but no - this works like the opposite of an Accelerated Share Repurchase. Call it an ASS - Accelerated Share Sale. AMC sells the APE shares to Antara, who then sells them into the market (on swap, via their counterparty).
i mean, nothing really changes in the whole story to your points, except that there's still APE overhang, and, potentially, lots of it... .
i think they can. they just can't transfer votes... " provided, however, that any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Purchased APEs does not impact the Purchaser’s ability to vote such Purchased APEs in favor of the Common Stock Amendment."
Yes I have the same understanding, and they wouldn't have included that language if they didn't intend to hedge via swaps. Similar situation as the ill-fated agreement between Elliott/TIG et al and Qualcomm on NXPI back in 2017/2018 (all those guys had the cash vs swap trade on)
Imo the risk on the arb using puts is more on the timing, given the high profile nature of AMC, there could be some delays/pushback on the SEC review of the proxy and 90 days is not a particularly long time to get everything in line for a special meeting
I spent months waiting for the haier d shares spread to narrow during which time I enjoyed a steady downward trend in pricing, and I got to watch the spread widen too! This case is a bit different as there is a 90 days timetable, but since the share price could halve during this time I suppose it would need to be a hedged position.
Bid/offer on the options seems wide. For example, I see offer side (on OMON) at 2.32 on the march $4 puts. At that price, the worst case (and base case) outcome is negative
AMC is down (as is APE) so the price has changed. I can't update the article in real time. As I write this, the offer on the puts is $2.10 and APEs are $1.65, so the spread is still very much alive.
One other thought on structuring this: if you just want to isolate the arb than a higher strike put is better (more in-the-money put will behave closer to a short of the stock, though without the borrow issues). I see $6 puts offered $1.75 above $4 puts which significantly juices the base-case arb. With APE at 1.45 and March $6 puts at $4.05 that starts to get more juicy assuming liquidity not a gating issue with the higher strikes (this holds even accounting for higher capital invested).
You mention that brandon sanderson is one of your favorite writers and suggest mistborn for first time readers.. But I think for a first timer a one volume such as Elantris (his first and some think his best) or Legion (my favorite) might be better choices. If one likes Sanderson's style then one can go to the more epic stories. Just my two cents.
Two points on what you migh tbe missing - 2nd one more relevant.
1) The "turnout adjusted number of shares" you`re writing about are misleading since as far as I understand, a failure to show up i scounted as a "no". That`s the reason AMC can`t get even simply things approved any more - too many retail investors that don`t turn out to vote, irrespective of the topic. But this shouldn`t change the expected outcome of an approval.
2) ...and this might get weird now. A key part of your thesis is that you somehow can short AMC with reasonable risk, and you described how to do that via put options. However, this makes the assumption that the strike price does not get adjusted. But: Some significant corporate event can lead the OCC to adjust the option contract in order to guarantee smooth trading, e.g. through adjusting the strike price. One of the coporate actions that can lead to that sort of adjustments are stock splits (see e.g. https://www.fidelity.com/learning-center/investment-products/options/contract-adjustments) Yes, I know, technically the split has already happened through the introduction of APEs. But to be sure, I think one would have to wait until AMC officialyl declares the date of the vote (then they need to inform the OCC), and close to the annoucnement of that date. the OCC would publish a memo (https://infomemo.theocc.com/infomemo/search) on changes in the options contract, if there are any.
Obviously, I might be totally off with this point, let`s see what you think.
Yes the options will get adjusted (less shares, higher strike) because of the reverse split - but what is the issue with that? Your stock+put position will still net-off
Thanks for your answer - but I think what you`re describing is incomplete.
There are *two* distinct corporate actions that shareholders will vote on in the exchange offer (https://www.bamsec.com/filing/110465922129353?cik=1411579): i) the conversion of APE into AMC, ii) a reverse split at 1:10 ratio.
In my eyes *both* lead to changes in the underlying options contract, but only i) has the consequence that the downside is not the +2.5% described by Andrew, but actually leads to a loss in a downside scenario. Part ii) does not affect the trade as you write.
I`m curious to see and learn about this, therefore here are more details - would be grateful to hear from someone more sophisticated than me what you think:
For simplicity, I will use the prices as they were when the artivle was written. I`ll also assume that we still have one APE per one AMC share, i.e. effectively a 2-for-1 split. Yes, it`s more APE shares now becuase of their ATM action - but the same logic still holds with more APEs.
Buy 100 APEs at ~1.9$, and 1 put option contract (that gives you the right for selling 100 APCs at 4$ each) for 200$ premium, 4$ strike.
Effect of i): The 2-for-1 split leads to the strike prices adjusted downwards to 2$ (4$ divided by split ratio). So you now spent 390$ for the 100 shares + put contract - but it`s not worth 400$ any more, becuase the strike has been adjusted. To make use of the put, the price of one AMC would have to fall below 2$.
Note also: Your contract is now good for 200 AMCs becuase the contract multiplier gets adjusted as well, but this won`t change the calculation above.
But will the OCC really adapt the strike for a stock split that technically has already happened?? I don`t know - and this is what I had meant above.
As you wrote correctly, the reverse split doesn`t change the scenario: Effect of ii) new strike price: 20$ (2$*10, assuming i) holds), contract now covers right to sell 20 shares of AMCnew. You now hold 10 shares of AMCnew plus the contract with strike 20$ for which you paid 390$. In the absolutely worst case, you now would exercise this put which would give you 200$, which would lead to a loss of 190$ on the 390$ you spent.
So in summary, the crucial point is: does i) lead to adjustments or not...?
Again: I might be totally off with this point, let`s see what you think.
This is not correct - the options will adjust properly to reflect the exchange ratio and the split. Ultimately instead of delivering 100 AMC shares vs. receiving $400, you would deliver 10 shares of post split AMC vs. $400 - the OCC adjustment will ensure that you deliver whatever the adjusted underlying security is vs. the same cash amount (no impact on economics).
That said, there is certainly risk to the trade - just don't think it's related to the options contract adjustment.
This is only true if you solely consider the reverse split (ie part ii) above). If I) is considered, you don’t get the 10 shares at 40usd but 20 shares at 20usd strike.
So you also seem to assume that the occ does not take the split into account - what makes you so sure about that?
All the exchange ratios I used are the right ones as per the exchange offer.
Yes. @sck400 you have the right instinct to double/triple check everything, especially when it relates to options, but I invite you to check historical adjustements for corp actions/share class conversions on the occ website: https://infomemo.theocc.com/infomemo/search
Thanks - I had posted this site already in my 1st post ;-)
The conversions I wrote about all come from recent examples. What of the things I outlayed above is wrong in your eyes?
i) is not a split
what we missed is that Antara can hedge their position on swap (they only have to keep the voting rights). Your post nicely points out how cheap they got their shares, and thus, how incentivized they are to just lock in their multi-bagger.
today's price action basically proves (to me, at least) that they're hedging. I had thought the overhang of the ATM was lifted, but no - this works like the opposite of an Accelerated Share Repurchase. Call it an ASS - Accelerated Share Sale. AMC sells the APE shares to Antara, who then sells them into the market (on swap, via their counterparty).
i mean, nothing really changes in the whole story to your points, except that there's still APE overhang, and, potentially, lots of it... .
I don't think Antara can hedge currently (look at 4.B, Purchaser Lock Up); i could be wrong
i think they can. they just can't transfer votes... " provided, however, that any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Purchased APEs does not impact the Purchaser’s ability to vote such Purchased APEs in favor of the Common Stock Amendment."
Yes I have the same understanding, and they wouldn't have included that language if they didn't intend to hedge via swaps. Similar situation as the ill-fated agreement between Elliott/TIG et al and Qualcomm on NXPI back in 2017/2018 (all those guys had the cash vs swap trade on)
Imo the risk on the arb using puts is more on the timing, given the high profile nature of AMC, there could be some delays/pushback on the SEC review of the proxy and 90 days is not a particularly long time to get everything in line for a special meeting
I spent months waiting for the haier d shares spread to narrow during which time I enjoyed a steady downward trend in pricing, and I got to watch the spread widen too! This case is a bit different as there is a 90 days timetable, but since the share price could halve during this time I suppose it would need to be a hedged position.
Bid/offer on the options seems wide. For example, I see offer side (on OMON) at 2.32 on the march $4 puts. At that price, the worst case (and base case) outcome is negative
AMC is down (as is APE) so the price has changed. I can't update the article in real time. As I write this, the offer on the puts is $2.10 and APEs are $1.65, so the spread is still very much alive.
One other thought on structuring this: if you just want to isolate the arb than a higher strike put is better (more in-the-money put will behave closer to a short of the stock, though without the borrow issues). I see $6 puts offered $1.75 above $4 puts which significantly juices the base-case arb. With APE at 1.45 and March $6 puts at $4.05 that starts to get more juicy assuming liquidity not a gating issue with the higher strikes (this holds even accounting for higher capital invested).
You mention that brandon sanderson is one of your favorite writers and suggest mistborn for first time readers.. But I think for a first timer a one volume such as Elantris (his first and some think his best) or Legion (my favorite) might be better choices. If one likes Sanderson's style then one can go to the more epic stories. Just my two cents.
i like them both, but i'd still rec mistborn!
Any updated thoughts now that the special meeting proxy is out? Looks like another 1/3rd dilution took place in ape since antaras buy?