Dear Subscriber,

Alert: In Transformity Capital Management, We are Taking ALL REMAINING NKLA Profits NOW  Remaining Warrants in all our managed accounts NOW and You Need To As Well

This Alert is for ALL TR Subscribers including All-Access members OK?

Why?

I just got off the phone with my Goldman Sachs trading desk, and they told me that the BIG NKLA shareholders and hedge funds are paying $1 PER DAY to short NKLA shares. That means they KNOW EXACTLY how many shares they will sell and are trading for a huge explosion in the NKLA float based on the cashless warrant exercise. 

IN short, the BIG MONEY is done with NKLA--and we DO NOT FIGHT the BIG MONEY, OK? 

1. Between PIPE shares and warrant exercises, Goldman desk expects NKLA's float to explode from 23 million to close to 99.4 million over the next 30 trading days

2. The $800M PIPE (private investment in public equity) investors in NKLA at $10 are about to be able to sell their stock.

3. Put Option traders are paying ENORMOUS PUT option Premiums and Short Sellers are paying $1 per DAY to bet on an imminent decline in NKLA's stock price and warrant arbitrage as they did when Virgin Galactic (SPCE) warrants and PIPE share came unlocked

4. Thus we have to play the SPCE playbook as well

5. Warrant arbitrage (selling NKLA shares short going long warrants) will lead to intense selling pressure on the stock.

6. WE could see NKLA back at $20 in a crash--and THAT crash would be our next ENTRY POINT! 

In short, based on the Virgin Galactic SPCE experiences and price action after they converted their warrants, we have to expect an NKLA share price crash—may be as low as $20--for similar reasons that saw the SPCE SPAC crash to about $15 from $40 last year.

This crash is purely based on the stock float mechanisms in the near future as the stock's float explodes. But the amazingly high implied volatility on put options compared to calls and the warrants still trading well under their intrinsic value are two signs that say "imminent decline" in NKLA price is a done deal. 

NOTE: IF you are not familiar with the SPCE crash after their warrant redemption, refer to this excellent analysis of the cashless warrant conversion for Virgin Galactic Holdings: Early Cashless Redemption Provision On Warrants Could Cause A Stock Price Crash". SPCE has since dropped more than 50% in less than four months.

In short, the “cashless conversion” means that after NKLA trades above $18 for 30 days (as is by far the most likely outcome) Nikola Motors has the right to redeem the warrants with NKLA shares, not cash.

KEY POINT: We HAVE to now assume NKLAS will go the cashless conversion route. 

Point #1: The main reason why NKLA has had such an amazing cult stock ride is as I have talked about multiple times the REAL float available for trading is far lower than its total shares outstanding. The  May 8th prospectus shows that there are 23 million shares from the old VectoIQ shell that are currently in the float of the total of 360 million shares outstanding. Subtract the shares from the true believer cult members--and the real float is more like 15 million shares. 

But, like the SPCE transaction, the REAL float is about to double as 52.5 million shares from the $800 million PIPE investment at $10 per share will be hitting the market upon registration of these shares. The company is required to register the PIPE share within 45 calendar days of the business combination that took place at the start of June. That means it will occur no later than mid-July but it could happen sooner than that.

Point #2 The borrow rates for shorting NKLA have gone through the roof, spiking as high as 400% or nearly a dollar per day per share. I have been around a LONG time on the Street, and the last time I saw it cost $1 a day to short a stock was 1999 and the insane theglobe.com IPO at $120 per share and $8 billion market cap.

It's obvious that the PIPE holders are trying to find any shares they can borrow at any cost in order to lock in huge profits between their $10 investment and the current market price of the shares.

Point #3: IF you want to lock in your profit in NKLA warrants, it will cost you $1 per DAY to short the stock.
They don't mind paying the high borrow fees because they know its only a matter of a few days or weeks before they can cover their short with their shares upon registration. They also know that over 50 million other shares are about to hit the market and they would rather guarantee a profit by shorting now rather than competing with those 50 million others trying to get out the door at the same time.
Options traders are betting on a severe imminent decline in the stock

Point #4: Under most circumstances, call and put options with short-dated expiries and strike prices that match a stock's current price should be priced about the same. In the near term, it's equally as likely that a stock moves up as it moves down. This is not the case for NKLA options. The implied volatility for the put options is much higher than the call options, and greatly increases with time.

Options expiring on July 24 have calls costing $8, so call option holders only need to see the stock move up 13% to break even. But put option holders need to see the stock drop to $30.86 or 52% just to break even.

What does that tell you?

Notice the variance in the pricing on put options with time. July 24 put options are $8 higher at $33.14. I believe this spike in demand for that specific option is from the PIPE investors. Instead of shorting the stock, these PIPE investors are buying the put option knowing that their shares will be registered by then.

They can use this option to lock in a price of $30.86 for their $10 shares.

Warrant arbitrage will add to selling pressure on the stock
There are 23.9 million Nikola warrants (NASDAQ:NKLAW) outstanding from the VectoIQ shell. They expire in five years and have a strike price of $11.50 and thus have an intrinsic value of $52.50 based on a $64 stock price.

However, they sell at nearly a $30 discount. This is because warrant holders cannot exercise their warrants yet, and te cashless exercise provision if the stock trades above $18.00 for 20 out of 30 days upon listing, which is a lock to happen.

I’ll get to the cashless exercise provision and how it works in a moment.

The warrants are supposed to be registered and become exercisable for cash within 15 business days after the completion of the business combination according to the warrant agreement. So we should see a filing shortly.

Upon registration, arbitrage seekers would buy the warrants and sell the stock to quickly close the gap in intrinsic value and then collect on their arbitrage by exercising each warrant plus $11.50 in cash for each share.

The mechanism of the cashless exercise is now betting on a NKLA to crash under $20 soon, for similar reasons that saw SPCE crash to about $15 from $40.

Now let’s get to the Volume Weighted Adjusted Price (VWAP)

VWAP is the average price of a stock weighted by the total trading volume. Search VWAP if this is a new term for you. 

The mechanism of the cashless exercise based on a VWAP to determine fair market value. For instance, if the fair market value ended up being $40, that would lead to the issuance of 17 million shares to expunge 23.9 million warrants based on cashless exercise. This is calculated as (40-11.5)/40 = 71.25%.

The company would save cash on dilution, but that would wreak havoc on the current 23 million share float. If the fair market value is $60, that percentage increases to 80% or 19.3 million shares issued to expunge the 23.9 million warrants. If the fair market value declines to $20, fewer shares would be issued but by then shorts would have already won.

Whether NKLA goes the route of cashless exercise and forces immediate exercise of a high percentage of the 23.9 million warrants or allows warrant holders to exercise all 23.9 million warrants at their own convenience over the next 5 years, selling pressure on the stock will occur.

Conclusion: TAKE PROFITS now and we reload on NKLA AFTER the huge dilution and warrant conversion, OK?

Congrats to ALL who have been on this NKLA amazing ride!!!

Toby