Nikola (NKLAW) – Capital Structure Arbitrage – 26% Upside

Current Price: $34.52 (warrant price + exercise price)

Estimated Return: $43.65

Upside: 26%

Exercise Date: 6th of July, 2020

Warrant agreement

This idea was shared by Tom.

 

Opportunity

Over the past week, many investors have focused on the performance of Nikola Corporation (NKLA).  However, for arbitrageurs the real opportunity is in Nikola Corporation’s warrants (NKLAW). During most of the past week, NKLAW has traded between $30 - $40/warrant below its intrinsic value relative to the common stock price. This offers an attractive capital structure arbitrage opportunity.

 

Background

Nikola Corp recently became a public company through its acquisition by a SPAC.  Nikola effectively inherited the capital structure of the SPAC.  SPACs are initially listed as units consisting of shares and warrants.  The shares and warrants ultimately trade separately.

The terms of the Nikola warrant are relatively straightforward.  It is a 5-year warrant.  Each warrant can be exercised into a share of NKLA at an exercise price of $11.50.  They can be exercised beginning 30 days from the completion of the merger (June 3, 2020) resulting in a first date of exercise of the 6th of July (3rd, 4th and 5th of July are non business days).  They are also subject to a “forced exercise” by the company, if NKLA share price remains above $18/share for 20 out of 30 trading days.  The notice period for redemption by the company (i.e., the “forced exercise”) is at least 30 days.  Once notice is provided, the holders are essentially forced to exercise their warrants or have their shares redeemed (which is a less attractive financial outcome).  The warrant terms are specifically detailed in the Warrant Agreement. The terms are also clearly explained on Nikola’s website on the investor relations FAQ section.

On the 12th of June (Friday) NKLA closed at a price of $64/share.  NKLAW closed at a price of $23.02/warrant.  Given the strike price of $11.50, NKLAW closed at a price almost $30 below its intrinsic value.

 

Recommended trade

The price discrepancy between NKLA and NKLAW is extremely unusual.  Why does it exist?  In part it exists for rational reasons that impact the hedging/transaction costs.  However, taking these costs into account results in a significant arbitrage spread.  There are several ways to hedge the warrants value (with different risks associated with each hedge):

Shorting NKLA. When presented with the above prices and terms most readers will immediately think, “buy the warrant and short the stock”. That was my first instinct.  However, NKLA borrow is difficult to obtain.  I was offered borrow at 175%/year fee when I first began investing in this position, but that borrow was available to me for about an hour on Tuesday morning and I have not been able to obtain any borrow since then.  Assuming that an investor is able to obtain stock borrow at a rate of 175%/year, the expected cost of borrowing NKLA until exercise would be approximately $10/share.  The resulting profit from the trade would be equal to the price at which the investor shorts NKLA less the cost of borrowing the shares less the strike price less the warrant price.  Using the closing values from the 12th of June would result in a profit of $19.5 (for purchasing a warrant for $23/warrant, shorting a stock at $64/share and holding the position for less than a month). Translating the $19.5 profit into a measurement of return on capital depends upon how an individual investor measures the capital of this type of trade.  The $19 profit is equivalent to a return of approximately 85% on the value of the asset purchased (in less than a month).  The primary risk of this trade are that the investor may lose their short borrow or the borrow rate may increase.

Synthetic short through options. If an investor is not able to locate NKLA shares to borrow and short or is uncomfortable with the risk of losing the borrow or the cost of borrow changing adversely the value of the warrants can also be hedged via a synthetic short created by the purchase of a put and the sale of a call with identical strikes. The price of the synthetic short is the Strike Price less the Put Price plus the Call Price.  I have created synthetic shorts using the July 17 maturing options.  Although there are July 10 maturing options I wanted to make sure that the time period between the option exercise (the 6th of July) and the option maturity (the 17th of July) was sufficient to settle the shares obtained via the warrant exercise.  Last Friday the July 17 $50 strike Put option closed at $20.35 and the same strike Call option closed at $14.00.  Thus the using the 50 strike options results in a synthetic short price of $43.65.  The trade would result in a profit of $9.13.  This profit is significantly less than the profit from simply shorting stock against the warrant, but it still provides a very high return for a low risk trade.  I believe this trade has two primary risks:

  • Account Equity and Margin Requirements – from an economic perspective the short calls are covered by the warrant. Unfortunately, in standard margin accounts, brokers will not consider this economic coverage and will treat the short calls as naked.  Thus, if the calls increase in value, the holder will be required to fund the losses on the short calls and increase the margin held against the positions.  It is likely that the warrants will be required to be paid for in full.  As a result, from a margin perspective gains in the warrant will not offset losses from the short calls.
  • Early Exercise of Short Call – the high cost of borrow makes it relatively more attractive for holders of calls to exercise early. The long call holder will exercise prior to maturity if the interest they could earn by owning the shares and lending them out exceeds the cost of financing the shares and the difference between the option price and its intrinsic value.  Depending upon borrow rates, this will be the case for deep-in-the-money short maturity call.

Both of these risks can be mitigated by using higher strike options to create the synthetic short.  However, as the strikes get higher the synthetic short tends to fall.

 

Related points of interest

Why have I assumed that investors will exercise the warrants as opposed to selling them?

  • I don’t expect the warrants to trade significantly above their intrinsic value because of Nikola’s redemption rights. Many factors will influence the timing of Nikola’s decision to provide investors with redemption notices.  However, I expect investors to assume that redemption notices will be provided as soon as possible.  After all, the dilution from the warrants is inevitable.  Why shouldn’t Nikola get the $11.50 in cash as soon as possible?  In any case, given how high the stock is trading above the strike price there will be little “option value” in the warrants.   I do believe that once we reach the first exercise date the warrants will trade at their intrinsic value (the difference between NKLA price per share and $11.50) unlike the current situation.

Why don’t long NKLA investors simply replace their long positions in the stock with long positions in NKLAW?

  • Why buy NKLA for $64/share when you can buy an instrument that is convertible into NKLA for $34.52/share ($23.02 to buy NKLAW plus $11.50 to exercise the warrant)? An investor that buys the warrant has exactly the same upside as one that buys NKLA, but can only loss $23.  The only investors that I can think of that would not buy NKLAW instead of NKLA are: 1) uninformed investors that aren’t aware the warrants exist, and 2) investors that trade at firms that restrict investors from trading warrants.  I hadn’t really considered this second possibility, but then I found a firm that does not allow its clients to purchase warrants.  Guess which one?  Robinhood!  Robinhood does not allow investors to purchase warrants.  Their explanation appears to be that too many investors inadvertently traded warrants instead of common shares by putting in the wrong stock symbol (eg, adding a W to NKLA and buying NKLAW, which would be a really fortunate mistake to make).  Since clients of Robinhood are thought to be relatively active investors in NKLA this point is quite interesting.

80 COMMENTS

  1. dt

    Seems like too good to be true.

    Is it guaranteed that warrants will be exercisable on the 3rd of July? Have the new shares to be issued from these warrants already been registered with SEC?

    1. Writser

      Indeed, I agree with mcg. There has to be a registration statement first and that should have been mentioned in the write-up. Cashless exercise is not possible for another 90 business days following the close of the business combination. Check out what happened with the SPCE warrants earlier this year.

  2. mcg

    several problems here:
    -Borrow was being quotes at 500% + over the weekend this is a significant risk for short equity positIons.
    -The warrants arent automatically exerciseable in 30 days. The underlying shares need to be registered with the SEC.
    -Cashless redemption significantly changes the risk/reward equation

    1. dt

      On redemption I read the following:

      “Redemption of Warrants for Cash. Subject to Sections 6.4 and 6.5 hereof, not less than all of the outstanding Warrants may be redeemed, at the option of the Company, at any time while they are exercisable and prior to their expiration, at the office of the Warrant Agent, upon notice to the Registered Holders of the Warrants, as described in Section 6.2 below, at the price of $0.01 per Warrant (the “Redemption Price”), provided that the last sales price of the Common Stock reported has been at least $18.00 per share (subject to adjustment in compliance with Section 4 hereof), on each of twenty (20) trading days within the thirty (30) trading-day period ending on the third trading day prior to the date on which notice of the redemption is given and provided that there is an effective registration statement covering the issuance of the shares of Common Stock issuable upon exercise of the Warrants, and a current prospectus relating thereto, available throughout the 30-day Redemption Period (as defined in Section 6.2 below) or the Company has elected to require the exercise of the Warrants on a “cashless basis” pursuant to subsection 3.3.1.”

      So these can be redeemed at $0.01/warrant, but if the warrants will become exercisable on the 3rd of July, then this redemption clause will be irrelevant as the 30 trading-day window will not have passed by then.

      Also from NKLA management perspective, exercise of warrants would bring in additional $230m of cash, so I doubt they will pass on this opportunity and redeem warrants instead. From dilution perspective that is only 6.5% increase in the share count.

      From the same perspective, what does company gain by delaying the registration of warrants?

      Having said that, I have limited experience with SPAC warrants and it seems like something is missing in this arbitrage trade.

      1. mcg

        SPCE was unable to get the SEC to approve of their registration statement in a timely manner so those warrants *never* became exerciseable.

        The inflow of cash argument is a good one, but it does not change the delay risk

        1. hedgehog61

          *Never* exercisable was not true. One it hit the 61st day without a registration statement effective, holders had the right to cashless exercise into clean stock. I did exactly that. The number of shares you got cashless was based on the 10 day vwap. They eventually called these using the cashless option.

        2. mcg

          Fair enough, I did that too. I meant never exerciseable for cash to be clear.

      2. Tom

        The Redemption by Nikola requires 30 days notice. During that period the warrant holder can simply exercise the warrant to avoid redemption.

  3. Jamal.Sydney

    https://nikolamotor.com/investors/resources?active=faq

    Company website says warrants will be exercisable July 6, so I think that must mean they plan to file a registration statement very soon. Although you’re right that this is not a guarantee.

    My fear is that they are also beginning to take truck reservations on June 29. If you are short naked calls before that, even though in theory you are economically hedged, just be careful to size the position small enough that you can survive the stock ripping (when they inevitably announce the next day that there were a ton of orders) and the margin calls that might come with that. Until that event is passed, I think it makes more sense to either be small in the collar hedge and take it up after that but before warrant exercise if the arb still exists – or just be long the warrants (looks like the margin of safety is pretty big – would require almost 50% drop in the stock to lose money).

    1. mcg

      Filing a registration statement is not sufficient, it requires SEC approval.

    2. dt

      NKLA stock rose +100% over the weekend (5-8 June), thus possibility of a 50% drop in a month sounds more than feasible.

      Margin of safety (in long warrants only) is not that big as it might appear optically.

  4. dt

    So the sole purposed of redemption clause is to make every warrant holder exercise during that 30 day redemption window – in that case this can be ignored.

    Then the key risk of this arbitrage remains whether the warrants will become exercisable on the 3rd of July or will it be delayed due management failing to submit or SEC failing to approve new share registration statement. If that happens and NKLA stock rallies the trade can blow up spectacularly.

    Anyone have any ideas how to handicap this? Any other historical precedents on top of SPCE? Also why did the SPCE registration statement was not approved?

    1. mcg

      No, it can not be ignored. They can force you into a cashless exercise which is based on a 10 day vwap instead of 11.50. That can be good or bad depending on the price action in the last 10 days of the call period.

  5. hedgehog61

    Warrants are not exercisable on July 6th unless there is a registration statement effective by that time. Assuming the common stays above 18 (which is highly likely) , the company can call the warrants at the earliest July 7th without an effective registration statement only if they use the cashless option. If the do this, the pricing mechanism for cashless if the 10 day avg closing price ending 3 trading days prior to the call notice. So if the avg closing price were $60, holders would be able to exercise into : ($60 -$11.5)/$60 = .8083 shares. So at $60 called, warrants are worth 60*.8083 = 48.5

    You have to assume company will call at first opportunity. Still a great trade if you can figure out how to hold a short.

    1. mcg

      A long put isn’t a synthetic short, its just a long put. If price goes above the strike price you no longer have exposure.

      Long put Short call has the exact same payoff profile as short stock.

      In theory it also makes for a cheaper combo if there is any premium in the call px

  6. g4734g

    Apparently the after hours market has figured out this tonites shelf reg is to satisfy the warrants…….NKLAW sold off down to 22 now almost 27…..NKLA was down to 60 now 64.5………………..inefficiencies do exist if only for a few minutes

  7. Tom

    Per IR at Nikola, they expect the shares to be registered in advance of July 6.

  8. g4734g

    Fidelity has now restricted shorting and naked calls on NWLA….anyone else seeing restrictions elsewhere? Arbs in control today but still a $25 opportunity…Hard to see how how NKLA doesnt move substanially lower assuming folks can get borrow. I have no postion at the moment, in yesterday and out this AM but would like to get back in under the right circumstance….thanks agian to Tom for the idea, you clearly were ahead of the game

  9. Tom

    Thanks g4734g

    Bummer to hear about Fidelity. I put my initial position on at Fidelity, including the sale of calls.

  10. Z A

    Can someone review this please as I am not that familiar with warrants.

    I am looking to mimic Toms trade, I purchased 100 warrants @ 29.5 (will give me 100 shares at approx $41 each), and then to hedge it I bought 1 July 17th PUT with strike 50, and sold 1 July 17th CALL with strike 50 for spread cost of 240, giving me synthetic 100 short @ $47.6 net. So if all works out this is 660 profit (excluding commission etc). Do I have this right?

  11. paul debrouwer

    Maybe a bit messy, but anyone has a good proxy hedge (other kinda similar stock) for NKLA ? Margin of safety is high in absolute terms & borrow costs high.. proxy does not have to be perfect! Thanks!

  12. jwestern

    Am I alone in thinking this is too risky? I wouldn’t want to hold a long or short position here. Maybe I just have PTSD from MCK/CHNG.

  13. Tom

    ZA – your calculations are correct. The risk you run with the 50 strikes is that with the stock trading above 60 you may get your call exercised against you. If you do, you will have to cover the short stock position and reestablish the short call (or find another hedge). Most of my position is in the 60 strikes (which don’t have as big a spread right now). I’ve had about a significant percentage of my short 50 calls exercised against me, but was lucky that the stock was down in the AM the next day when I covered the short.

  14. Tom

    g4734g – I was able to sell short NKLA calls at Fidelity this AM. I own the warrants in the same account, by I’m still pretty sure they are treating the calls as naked.

  15. g4734g

    Tom, thanks for the heads up. I tried it again after buying the warrant and still no luck. I was trying to get to 70 strike done and pick up about 5.20. Had about a 20 minute conversation with Fidelity they are saying no way even if you own nklaw. She checked checked with a couple supervisor same answer

    1. Tom

      g4734g

      This AM I was not able to short the calls at Fidelity. Fortunately, my other brokers are still allowing me to do so

  16. jf

    Hey everyone, thanks for both the writeup & the subsequent discussion. Very intriguing. I have several questions still bugging me though:

    Now, my principal concern here is the mechanics of the synthetic short. How does one best manage the position given the relative price action of the underlying since the reverse merger? There’s very little historical data (for NKLA) to go on here, so my expectation is serious continued volatility. Indeed, the implied vol for all the options is extremely high. I see several of you have been exercised out of the short leg, so how do you best mitigate the downside there? I mean, following a cover, say you the reenter the following session, what’s the cost? And how can one best model this into their expected payoff?

    Second, and this is really independent of the trade arb itself, doesn’t anyone have any concerns about the clear bullshit of this pre-rev co? The general frothiness of the market already leaves a bitter taste in my mouth, so that this is a pre-rev going (not even, really) concern, worries me.

    Third, while there are lockups in place, there appears — if I’ve read the filings correctly — to be a quite a bit of dilution on the immediate horizon (somewhat coincidentally following the next pre-order date). Even with the downside protection in place, am I the only one this doesn’t sit well with?

    Lastly, they filed the shelf registration, but some have mentioned this isn’t sufficient for warrant exercise until the SEC okays it. At what point will we know of a definitive approval?

    Thanks all for being patient with the longwindedness.

    1. mcg

      > Lastly, they filed the shelf registration, but some have mentioned this isn’t sufficient for warrant exercise until the SEC okays it. At what point will we know of a definitive approval?

      When the SEC approves it, there will be an edgar filing stating so.

    2. paul.debrouwer@protonmail.com

      My answer is make your total long 2.5X bigger in dollar value than your synthetic short exposure. That way you mitigate margin call risk in squeeze scenario

  17. Tom

    JF

    I exchanged email with Nikola IR the day that they filed the shelf registration. They conveyed confidence that the approval would be granted significantly in advance of the exercise period.

    Regarding the impact of early exercise of the short call upon the hedge I’m much less concerned about this now that I have had it happen. The last two days I have had some of my short 50 calls exercised against me. My initial thoughts are that from my perspective the impact has been minimal and likely slightly positive. Early Thursday morning I learned that on Wednesday evening I had been exercised on some of my short 50 calls. The short calls had been replaced with a short position (for which I was not charged a rebate for the overnight position). When they were exercised, the options were still, obviously, trading above intrinsic. So, I captured the difference between the intrinsic and the option price when it was exercised. On Thursday morning, I simply simultaneously covered the short NKLA and shorted the calls again (at a small premium to the intrinsic). I didn’t have market risk overnight, because I had the short NKLA position. A short stock position is effectively the same as a short deep-in-the-money call and I held one or the other throughout the exercise and the reestablishment of the short call position. Net, I may have incurred some transaction costs trading the options, but I benefited from gaining the price vs intrinsic value spread on the exercised call. I’d appreciate hearing other people’s thoughts on this topic and in particular what I might be missing.

    1. nostradamus

      “(for which I was not charged a rebate for the overnight position)”

      you pay the borrow on settlement date, not on transaction date.

      1. Tom

        nostradamus,

        I don’t think I will be charged a borrow. It seems that the settlement for the option is effectively T+2 from the morning after the exercise which is the same as the settlement date for the stock I buy the morning after the exercise. For instance, assume you were exercised against a short call position after the market close on Friday. The settlement for the stock is Wednesday. If you buy stock on Monday morning (which you broker probably requires) it also settles on Wednesday.

  18. blades

    FYI my $50 short call position at Etrade was exercised against me. They didn’t buy in the short position for lack of borrow, but I had to buy in myself because borrow rate was 850%! Lesson learned.

  19. Terence

    Hard to believe NKLAW is still $25 below NKLA+exercise price. This stock can drop to zero anytime, but it sure is tempting to buy a lot of warrants!

    Some articles on NKLA. Cowen targets $79, outperfom rating, the only firm rating it, and is not exactly a disinterested party. Lots of short sellers.
    https://wccftech.com/nikola-nkla-seems-to-be-catching-wall-streets-attention-as-cowen-inc-initiates-coverage-of-the-stock/
    https://seekingalpha.com/news/3583759-nikolaplus-5-cowen-long-term-believer-in-growth-story
    https://www.cowen.com/insights/creating-a-next-generation-transportation-company/
    https://www.bloomberg.com/news/articles/2020-06-17/nikola-wins-first-buy-rating-though-cowen-target-trails-record

  20. jwestern

    Any insight on what the price movement will be after the shares are distributed out? Anyone who’s short would just close their position without causing any buy or sell pressure. But I suppose a subset of people going long-only on the warrants would be dumping their shares as soon as they get them.

    So net selling pressure? Would just buying puts make sense?

    1. nostradamus

      The puts are crazy expensive. The borrow is excessive beyond belief. This trade is extremely crowded from every possible angle. It doesn’t trade on fundamentals, but on sentiments. Honestly, I don’t get the fascination for trying to put these kinds of trades on in a stock like this, even the “arbitrage” (if you could call it this) angles are crazy risky. I strongly believe there’s no free lunch in a stock like this; you might win, but you might win in a casino as well.

      1. jwestern

        Yeah I feel like it’s too fast-paced for me. Getting exercised on, having to cover, re-hedging… Too much maintenance and I’d expect to screw something up under pressure. Fun to watch though, with some educational value for me.

  21. likquidfied

    Is it guaranteed that warrants will be exercisable on 7/6? I see everybody is talking about this arbitrage and seems to be crowded. The biggest risk is that the warrants are not exercisable. Can someone confirm?

  22. Zachary Goldberg

    Any one know if the most recent S-1 includes the 52.5m pipe shares? It doesnt appear to have any lock-up period either.

  23. ActOfWill

    My 2 cents..

    Unfortunately we, as mere mortals, are not able to earn the borrow fee on NKLA – which currently stands at 865%.

    However, if you WERE able to – then it would not be a bad trade to go LONG NKLA and SHORT NKLAW.

    My calcs show per unit you would earn ~ $1.45 / day based on current rates in IB.

    It would take you ~ 18 days to earn back the elusive “Arbitrage spread” of USD 25.56. Which brings you to 9 July 2020.

    Ceteris paribus you hence make money if the registration statement is NOT approved before such date. Perhaps that is bet that investment bank that earn borrow fees are taking against the the opposite trade.

    Anyone knows why the approval can be delayed based on historical precedent?

    1. mcg

      Read above, i explained several ways this trade would go sideways. You should earn 50% of the borrow fee if you lend out your shares as a retail trader. see IB stock yield enhancement program

      1. ActOfWill

        I excluded us as “mere mortals” that can only get 50% – should have been more clear.

        Bigger picture – it seems from the discussion above one and another is struggling to put on the trade… just trying to make this forum aware that in trying so you are “giving” the opposite trade (which looks rather nice and we can’t access) to someone else who can access it…

  24. g4734g

    retail clients can sign up at most brokerages to participate in the lending programs and earn for lending out their shares…..but you are not earning that entire borrow fee……they are taking a big chunk of it……Perhaps you are correct for the Morgan Stanley trading desk who’s keeping that entire fee, different calculation

  25. jf

    I just want to thank everyone for the lively bit of discussion over the last week. It’s been very informative as to all’s thinking on this.

    Personally, and today’s price action aside (a bit of convergence, perhaps?), I’ve declined to step in on this one. Simply put, I can’t get past my emotional response to the fact that this thing is pre-revenue.

    As a lead off from that, has anyone ever participated in/know of any past deals (gone through or not) that’ve involved not-really-going concerns as such? Late 90’s perhaps?

  26. Paul Debrouwer

    Anyone knows the typical amount of days between registration statement to SEC effectiveness declaration?

  27. jf

    JPM’s NKLA coverage:

    “As far as numbers, the firm thinks execution of the multi-year Nikola plan could result in $1.5B to $2.0B of EBITDA on nearly $14B of revenue as early as 2027, cumulative contracted lease revenue of ~$30B, ~30% recurring revenue and strong cash flow into 2030s.” &&& “JP’s price target of $45 is based on 30X the 2027 EBITDA estimates of ~$1.7B, discounting to PV market cap using a 20% cost of equity. The PT is well below the average sell-side PT of $79.45. A Neutral rating is assigned to shares.”

    What blows my mind is even the $45 estimate is based on a 30 multiple of non-cash operating earnings. It’s all just conjecture at this point, the business model. It reminds me of Michael from ‘The Office’ where he says, in effect, “I thought I’d be a millionaire by 30. When I didn’t get there, I thought surely I’d be a millionaire by 40. It turns out at 40 I’d less money than at 30.”

    In my view, a lot of this positive sentiment is simply buoyancy to prop up the price until a sufficient exit point is obtained for already invested private capital.

  28. Brian

    It was also written up on another blog (Sifting the World) that’s behind a paywall yesterday when the warrants were around $29.

    Puts are expensive? Sell some puts! A July 2nd ATM put literally decays by 15% a day. The trend is your friend…

  29. Z A

    Folks. i put this trade for a day on 17th where short call was assigned to me straight away. On 18th morning it showed up as 100 short so I closed my short as soon as market opened, and closed other legs too (long put and warrant). IB is charging me three days interest @ 770%, saying 17th assignment settled on 19th (friday) and closing on 18th (settled on 22nd (monday) so three days interest. Even if it wasn’t weekend, you would be charged one day interest if you close your assigned short the next day. Expensive lesson learned. Is anyone else being charged interest? Check your interest statements if you are closing your assigned calls next day.

    1. mcg

      Yes, that is correct in terms of how o/n interest is done for option assignment

      1. Z A

        Strange that short NKLA position (from assignment) shows trade time of 1AM ET on 18th, but they are treating it as it was done on 17th (and hence earlier settlement) but perhaps that is norm?

  30. Tom

    ZA – I’ve had just the opposite happen (I’m hoping it won’t be amended). Using your example, let’s assume I got exercised against after the close on the 17th and bought the stock to cover the position on the morning of the 18th. Both positions have a settlement date of the 22nd.

    1. mcg

      Assignment happens on the day of, so your cover order would settle one business day after your assignment.

  31. Terence

    No update yet after the S-1 filing on June 15. Per Tom’s post on June 19, as of June 15 Nikola’s IR expected approval “significantly in advance of the exercise period.” (may no longer be true) While DT thinks “the amount of time it will take for the consent to be granted is indefinite (could be a couple of weeks or a couple of months).”

    If no approval yet on July 6, what happens? Do you expect a selloff of the warrants, or is this already priced into the warrant’s current “discount”?

    1. Terence

      Anyone have any update on the approval of the registration filing?

      1. Terence

        Thanks, AFPond. IR’s original expectation was too optimistic anyway. There is nothing like a deadline for approval in the filing, except that the warrant holder may opt for the cashless exercise (which is equal in value as a regular exercise, as I understand) if there is no approval yet after 90 days from June 3, as pointed out by Hedgehog and Mcg earlier.

  32. Tom

    In addition to AFPond’s comment regarding the amended S-1, it’s worth noting the change in Nikola’s FAQ response to the question regarding the exercise of the warrants. The response is now:

    Public warrants may not be exercised for cash until the later to occur of July 3, 2020 and the date on which our registration statement covering the shares issuable upon exercise of the public warrants has been declared effective by the SEC. As with all registration statements, the registration statement will not be declared effective by the SEC until the SEC completes any review of the registration statement and declares it effective. The warrants will expire at 5:00 p.m., New York City time, on July 3, 2025 or earlier upon our redemption of the warrants or our liquidation. In addition, public warrants may not be exercised for cash unless the registration statement covering the shares issuable upon exercise of the warrants is effective and current and the prospectus relating to those shares is current.

    If the registration statement covering the issuance of the shares issuable upon exercise of the public warrants is not effective by September 1, 2020, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement or a current prospectus, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act of 1933. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless basis.

    1. Terence

      Thanks, Tom. So, after Sept 1, if the registration is not effective, and an exemption from registration is not available, the warrants are useless. I guess this is a risk of owning the warrants, but does anyone know the chances of this happening (not effective and no exemption)?

      1. Terence

        Right now, NKLA is down $4+ while NKLAW is up $3+, reducing the gap to $15, probably due to the amended filing. The gap was around $25 after the first filing, and $30 even earlier before the filing.

  33. Walter

    With the warrants up 11% and the stock down 6% today, the spread is only $15. With a borrow rate of 950% on the stock, that’s only ~9 days worth. So unless you think there’s a high chance the SEC declares the new shares effective next week, seems like a great time to book gains.

  34. blades

    Thanks, Tom, very helpful. So for now need to have the Registration Statement effective before we can exercise cashless or regular way

  35. Terence

    A volatile July: NKLA down from $60s to $40 and back to 54. NKLAW down from $33 to 20, back to 26. The “gap” between the two was down to only $8 at one point, now at $16. Filing still pending.

    Any comments from Tom, etc? Thanks.

  36. Tom

    My position has remained relatively unchanged since I wrote the initial article. My hedge has changed a bit. Initially, I hedged with synthetic shorts struck around NKLA’s price. After a few days, I shifted to simply selling in-the-money calls (currently mostly 30 strike calls maturing 7/17). The value of this type of hedge comes down to how your broker treats it when the options are exercised (which is essentially every day). Based upon the daily volume in the deep in-the-money calls, I believe that most traders are using the calls as a hedge against the warrants. On Friday, over 50,000 calls, maturing on 7/17, with strikes of $45 or less traded. This is equivalent to 5mm+ shorts. The options basically trade at intrinsic value during the day and the vast majority are exercised after the close. This creates a naked short position which needs to be covered. However, there does not seem to be any uniformity in how brokers treat this short position and finding a broker that treats it favorably (for the client) is key to being able to maintain a hedged position at an affordable cost. I have used 3 brokers to sell these options and they have treated them in two different fashions. One broker will no longer let me sell uncovered in-the-money calls on NKLA. Their compliance people have judged that it is essentially a way to create a short position without borrow. The other two brokers have let me sell the options day 1, buy back the shares to cover the exercised options day 2 and short more options on day 2. I have not been charged any borrow on these shares. As reported above in other contributors comments, some brokers (both Schwarb and Interactive are mentioned) are charging borrow on these trades. My feeling is that charging borrow is unjustified, because I’m confident that the broker has never borrowed any shares on the hedgers behalf. The exercise of the options is not known until long after the stock lending and the market has closed for the day. Essentially, if you can buy back the stock and sell the calls at zero intrinsic value (relative to the stock trade) you will have created your short at zero cost. I believe that I have lost a few pennies on average every day rolling this hedge. However, the cost of borrowing shares is much greater than a few pennies. For example, a 200% borrow rate is equivalent to approximately $0.30 per day.

  37. Tom

    What great news to start the weekend – the prospectus is effective. The spread has collapsed. As of Thursday’s close, NKLA – NKLAW – $11.50 = $17.67. In after hours trading today, NKLA – NKLAW – $11.50 = $1.96.

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