Betting for or Against Trump SPAC Is Expensive as Options Trade Begins– Barrons.com
BY Dow Jones & Company, Inc.— 2:57 PM ET 10/25/2021
Andrew Bary
Let the Games Begin, stock market fighting back, never bet against a winner
Options trading began Monday in Digital World Acquisition (DWAC), the so-called Trump SPAC, and prices for calls and puts are very high, reflecting the volatile recent trading in the stock.
Shares of Digital World Acquisition ( DWAC) , which rocketed higher last week after announcing a merger with former President Donald Trump's new social media platform, Trump Media & Technology Group, were down 8%, at $86.44 in heavy trading Monday of about 60 million shares. Digital World Acquisition (DWAC) is a special-purpose acquisition company or SPAC.
More than 50,000 option contracts have traded so far Monday and the implied volatility of active contracts expiring in mid-November around 250%.
It is unusual for an individual stock to have implied volatility above 50%. The S&P 500 index volatility is under 20%. Roughly equal numbers of puts and calls on the SPAC have traded. Other meme stocks like GameStop ( GME) and AMC Entertainment Holdings (AMC ) have had similarly high option implied volatility.
High implied volatility means that the options are very expensive. The most active SPAC call, the November 100 strike, which gives the holder the right to buy the stock at $100, trades around $15. The most active puts, the November 95 strike, trade at about $30.
If the put holder waits until maturity on Nov. 19 to exercise, the stock would need to fall below $65 for the put to be profitable. That is a large decline from the current price, but the SPAC did trade around $10 before it announced the Trump deal.
Most options, however, are held for a short period often for less than a day with holders looking to make quick profits with leveraged bets for or against the stock.
The biggest option trade so far Monday in the SPAC was a negative bet through the purchase of 2,686 of the November 95 put contracts (each allowing the sale of 100 shares) at $29.50.
The options trading could affect the Digital World Acquisition (DWAC) warrants (DWACW), which trade cheaply versus the stock. The options offer a way for investors to hedge a long position in the warrants. The high price of the options, however, makes any hedging activity very expensive.
The Digital World Acquisition ( DWAC) warrants were down 8%, at $26.77. They trade way below their intrinsic value given an exercise price of $11.50.
Their intrinsic value (calculated by subtracting the exercise price from the stock price), is around $75. A major reason for the depressed warrant price is that investors can't exercise the options until September 2022, as in the SPAC's prospectus.
The low price of the warrants relative to intrinsic value also indicates that investors are banking on a lower price for the SPAC in the future.
It's common for warrants on meme stocks to trade cheaply versus the stock because many retail traders would rather play the stock and some can't easily trade the warrants.
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