Crazy Borrow Fee?
Undergrad currently working on a short for a ~$1bn market cap that pumped 500% this year, but is very clearly a fraud. Independent of the fraud, the Company’s business plan is wildly unrealistic and they’re taking advantage of retail optimism & sketchy promotion tactics (like blatantly lying about progress).
But the borrow fee is like 100% – I know that’s a huge but.
Is there any good rebuttal for this / good way to spin it? Also, can someone explain why the borrow fee is so high? The stock’s short interest is about 15% so I don’t understand the ridiculous fee.
everybody else has the same idea as you, and the remaining long holders aren’t opted in to lend shares. Simple supply-demand issue. Putting on a short at these borrow levels implies you think that the stock will lose money faster than benchmark + the borrow rate… in this case if you think it’ll take 3 months to go to zero, you’d make 100% - 25% paid in borrow. Make sense?
Agree. I would add that these types of shorts are incredibly dangerous, particularly at MMs where stop loss limits are tight. Whatever your thesis is, it probably made a lot of sense also when the stock was at half the current levels.. meanwhile the stock keeps squeezing and can put one out of business before the fraud finally implodes.
Maybe check to see what options market looks like and what other securities are available to try to structure an interesting trade? I'd imagine the implied volatility is sky high on a stock that has gone up as much as you say, but perhaps there is an interesting combination of positions like purchase the stock, lend the stock at 100% rate, and use the proceeds for premium outlay for some type of put structure that would pay out more than the losses from the underlying stock in certain scenarios. It sounds like the market cap is too small to have enough liquidity for meaningful options, but the idea is that you can showcase your ability to work through different scenarios and across securities to try to express a view. For larger companies with debt, you can similarly think about if there is maybe an opportunity in the credit rather than in the equity.
Editing after a few more minutes of thought - I don't work in Equity L/S nor have I ever pitched a stock so the above might be bad advice and hopefully someone else can chime in. On the Macro side and the best comparison would be you think you have a great idea / story, but you hit a roadblock in the pricing of the first product you look at that makes it look unattractive to implement the trade. Well ok - check other products / asset classes. Say there is an EM country where the currency has gotten destroyed and you think it looks overdone, but there is a chance the country could actually face severe problems and the currency could move a ton against you in that situation so you are reluctant to buy the currency. Maybe there is an attractive skew in FX options you can take advantage of instead. Maybe you can still buy the currency, but the credit spreads are really low so you buy some protection via CDS. A lot of the times, getting the story right is the easy part and the hard part comes down to timing and picking what securities to express an actual view.
The options and swaps markets should price the borrow (to term) correctly so there is no free lunch.
There could be some difference is the cap stack i.e. you could borrow the debt if there is any but obviously upside is lower.
You could look if there is any upcoming liquidity that will free up supply of the stock (lock up expiry, equity offering, insider sales)
Also based on my experience (not at a MM) if the borrow is being shown at 100% you can't borrow much and wouldn't be worth it from a sizing perspective
Just find a different stock bro
I wouldn’t bother at that borrow rate, it’s just not going to offer you good risk adjusted returns. You can keep watch of it and it pumps another 5x and blows out all the shorts then the borrow will be cheaper and you’d probably get in at a safer price. It’s much easier for a $1B market cap company to get to $5B than a $5B market cap company to $25B.
IV probably makes buying puts prohibitive too. In these cases I like to sell calls. Get short delta and sell vol at elevated levels
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