Cynk Technology: A Win-Win (Or Lose Less) Solution For Both Longs & Shorts

Jul.13.14 | About: Cynk Technology (CYNK)

Summary

The halt of Cynk Technology shares has created an uncomfortable situation for both CYNK longs and shorts alike.

Longs suffer from the high probability that shares end up worthless. Shorts suffer from high borrow costs during the duration of the halt.

By contacting their brokers to loan out Cynk shares owned, longs can re-coup a potentially meaningful percentage of their capital through rebates while lowering borrow costs paid by shorts.

This is a win-win (or lose less) for both longs and shorts in this unfortunate situation.

In the aftermath of the Cynk Technology (OTC:CYNK) share halt, both longs and short are in uncomfortable positions. Longs are stuck holding the bag on shares which in all likelihood will end up worthless or near worthless. Shorts are suffering from extraordinarily high borrowing costs on CYNK shares. These borrow costs will continue to penalize short sellers throughout the duration of the halt. The borrow costs paid by short sellers are collected by those who are long CYNK shares and have arranged to loan out these shares to shorts (by contacting their broker). As it was well telegraphed that CYNK shares had no fundamental value, most of the longs holding the bag were likely day/swing traders who were playing the vicious short squeeze unleashed on CYNK shareholders by the insiders (who are now being investigated by the SEC/FINRA).

By definition, most day/swing traders do not hold positions long enough to make it worth their while to go to the trouble of instructing their brokers to loan out shares. In the case of CYNK, doing so would have been disadvantageous as it would have undermined the very short squeeze they sought to benefit from. However, at this stage, with shares halted for an indefinite period of time (SEC has halted for 10 trading days though FINRA halt could last longer) but with near 100% certainty of a 99+% loss upon de-registration or resumption of trading, there is only one way for traders to re-coup part of their eventual losses: by instructing brokers to loan out their CYNK shares to short sellers.

As noted by SA contributor Paulo Santos, as of yesterday, the cost of borrow for CYNK shares was running 144% per year (or 12% per month). Ironically, it is entirely possible that the insiders who orchestrated this are still profiting from this scheme (receiving borrow costs from shorts) on the extremely limited number of shares they have loaned out. Non-insiders who are long the stock can potentially re-coup a meaningful percentage of the capital they speculated on CYNK by contacting their brokers to loan out the CYNK shares in their account.

Assuming the cost of borrow (paid by shorts; rebate to longs) stays constant and CYNK shares remain halted for 3 months, longs (who bought in at the $13.90 closing price on 7/10) could re-coup 36% of the capital speculated. With a 6-month halt, 72% could be re-couped. Given that the cost of borrow is set by supply and demand, should a number of longs participate in loaning out shares it will likely cause the cost of borrow paid by shorts (and rebate received by longs) to decline. Even if it were to fall by half to 72%, it would still allow longs to re-coup 18% and 36% of their capital in a 3 and 6 month halt, respectively. This would be beneficial to both longs and shorts. To be fully transparent, as noted in the disclosure section, I have a short position in CYNK and would benefit from a decline in borrow costs.

The CYNK situation has created discomfort for both longs and shorts alike. The solution proposed above is mutually beneficial as it allows both sides of the trade to mitigate losses. Happy investing to all.

Disclosure: The author is short CYNK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.