Short Sellers Are Circling Nikola's Stock
- The short sellers are focused on Nikola's stock with an insanely high cost to borrow shares.
- Options traders are making bets the stock plunges too.
- The future may be too far down the road.
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The short-sellers are circling Nikola's (NASDAQ:NKLA) stock and they seem ready to pounce on this one. The cost to borrow shares to go short is at crazy levels that seem hard to believe. Meanwhile, the options traders are betting the stock falls in the days ahead.
The stock currently has a market cap of $28.77 billion, which seems very high for a company that has no revenue and isn't expected to have a meaningful revenue stream until 2023. It gives the company a market cap on par with Ford's (F), which stands at $28.8 billion.
The company's presentation from March shows that they project revenue of $3.2 billion in the year 2024. That means the company is currently trading for 8.9 times four-year forward sales, an insanely high valuation. Sure, Tesla (TSLA) traded at some crazy valuations, like 24 times sales in 2012, but that wasn't for forward sales projections.
Whatever the future may be for the company, regarding its plans for pickup trucks or semi-trailers, it is a long way down the road, and the shares are trading as if this future is inevitable, and better yet, remains on schedule.
Short Sellers Are Circling
It is likely the reason it cost the short seller about 350% on an annualized basis to borrow shares of Nikola, to use to then go short. It is an extremely high rate to pay to borrow shares of any stock. For example, when I first noticed the same thing going on in Virgin Galactic (SPCE), the borrow rate was just 44% on February 19.
It means that the stock has limited supply and a lot of demand from traders to borrow the shares to then likely go short the stock, a bet the stock falls.
Using Options Too
Additionally, traders are betting the stock falls using puts. The open interest levels of the July 17 $90 puts increased by roughly 5,500 contracts on June 10. The puts traded on the ask for a price of $51.80. It means that for the buyer of the puts to earn a profit, the stock would need to fall below $38.20. That is a drop of 47% from its current price of around $72 on June 10.
Also, the $90 calls for the same expiration date saw their open interest levels rise by roughly 6,100 contracts on July 9. These contracts were traded on the bid and were sold for a price of $13.90. It is a bet that stock is not above $103.90 by the expiration date.
Overall it appears that these two trades were part of a spread transaction, which means the trader likely paid out the difference between the $51.80 paid and the $13.90 received, or $37.90. Overall it means the stock needs to fall below $52 for the trader to be profitable.
Weak Technical Take
The technical chart, in the short term, shows a bearish pattern forming known as a descending triangle. It suggests a potential drop in the stock back to around $57, should it fall below support at $72.
However, should the stock manage to hold support around $72, it could result in the shares surging back to their recent highs. Outside of the technicals, this is a very volatile market, that seems to be driven by a strong underlying bullish tone, whether it deserves to be or not, driven by low rates and easy money.
It seems that short sellers, the options traders, are thinking on the same page here, and that could spell trouble for this high-flying stock.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
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