If you missed the SPAC crazy of 2021, perhaps you’re better off. Special Purpose Acquisition Companies (SPACs) were supposed to be the great democratizing platform that brought venture capital investing to the masses. Instead, it fostered a series of bad deals, bad incentives, and peculiar arbitrage trades that allowed institutional investors to profit at the expense of retail investors.
One of the most common trades was known as the SPAC-arb trade. Because investors can turn in their shares at $10.00 and receive their money back if they don’t like the SPAC deal, institutions would gobble up as many shares as possible any time that the price of a space share fell under that level. So, if you bought up shares at $9.50 and the company announced a deal for a vote, an investor could redeem shares on the day of the vote for $10.00. So, make fifty cents on that trade. It doesn’t sound like much, until you see the volume.
Now, this SPAC-arb trade has created a new frenzy. It’s called the short squeeze. It goes like this. There are countless investors out there who are either buying puts on some of these SPACs or outright shorting them ahead of the deal. However, with so many investors planning to just turn in their shares at the time of the deal vote, there suddenly becomes a dearth of shares available on the market.
As a result, anyone who was shorting the SPAC ahead of the deal must now turn around and buy back the shares to close that position. We are seeing a significant number of short squeezes shortly after shareholder votes. Not every deal leads to a short squeeze. But there are enough that I’m noticing a pattern. And, I want to capitalize on this trend.
How to Capitalize on This SPAC Trend
So, on Monday, I’m watching a deal between the BowX Acquisition Group (NASDAQ:BOWX) and WeWork. Yes, that WeWork. The real estate and popular work-sharing giant wants to go public. Finally…
Remember, this IPO failed miserably a few years ago. This may never be a profitable company. But WeWork has the support of private equity dollars and voters are eager to approve the deal. I think the deal is garbage. But I can’t help but notice that 16% of shares outstanding are currently being shorted. And I expect that there will be a lot of shareholders who suddenly redeem their investment and maybe keep the warrants associated with the deal.
A short squeeze could occur, followed by a precipitous slump in the price. Regardless, here’s how I recommend investors take this trade. First, set a Buy Stop order of $10.25 at the opening bell. If your order is accepted, you’ll immediately want to set a hard trailing stop of $10.05. You’ve defined your downside: Twenty cents per share.
If a short squeeze occurs, there is no limit to where this stock could go, but if shorts are covering, and there are limited shares, it’s fair to say that a move to $15 to $20 is possible. If you get a pop, you’ll want to raise your trailing stop up at the end of the day to about 25 cents under the closing price. Do this until the stock finally has a down day.
This is now the only SPAC that has a vote next week. Take a look at GS Acquisition Holdings Corp II (NYSE:GSAH) and Big Cypress Acquisition Corp. (NASDAQ:BCYP) as well. Follow that strategy. I’ll circle back with you to see where these SPACs end up next Friday.