Lots of folks love to go for the grand slam with SPAC trading as of late. They want to grab the stock in the teens or twenties and ride it to $100. It's happened a few times, but over the past nine months, we've watched many more SPACs settle in the teens. If you were in early, these are still great returns. If you came late, you may be underwhelmed.
One trend I've noticed is a bit of malaise after a SPAC completes its merger and changes the ticker system to the company it purchased. After a bit of time, these then seem to come to life and experience a small surge. Again, many of the pre-merged popular names (I'm looking at you electric vehicle companies) return to the upper teens or lower twenties. Even the pre-merged active names can experience the same type of action.
Rather than playing the stocks and opening up downside that could be 30% to 60%, I've settled on a call combination strategy that has worked extremely well over the past six months. Yes, it has limited upside. Yes, the trade can lose all the capital risked, but in terms of a nominal comparison to owning the underlying stock, it offers an attractive risk versus reward. By nominal I mean using one call combination trade rather than buying 100 shares of stock.
Let's look at one I put on today.
Metromile (MILE) was trading at $19.80 per share. Rather than buying the stock, I moved forward buying one March 19, 2021 $17.50 call, selling two March 19, 2021 $25 calls, and buying one long March 19, 2021 $30 call. The end result is long 2 calls and short 2 calls. This is nothing more than a skip strike butterfly. The cost for the trade was $1.90.
Why do I like this?
Well, my breakeven is $19.40. That means my trade is $0.40 in-the-money already. If nothing changes over the next month, I'll sell for $230 after paying $190. If MILE closes around $25 next month on expiration, I'll be able to close this for around $750, a profit of $560. That's about the same as buying the stock. If it goes to $30, I'll only be able to sell this for $250. That's still a profit. While $60 profit on $190 risk is nice, it would be nothing compared to buying the stock. However, if the stock fell to $15 or to $12.50, my loss is limited to $1.90. With the high implied volatility around these types of names, the trade could probably salvage ten or twenty bucks. Obviously, if one bought the stock, the losses could be $5 to $7 per share.
Additionally, the low-cost approach of this strategy allows me to employ it across multiple SPAC names like MILE, GigCapital3 (GIK) , Peridot Acquisition (PDAC) , Property Solutions Acquisition (PSAC) , and Tortoise Acquisition Corp (SNPR) . Maximum success on one and basic success on the other would allow the others to expire worthless and me still come out well ahead. Even moderate success on half the trades will keep a trader in the game.
With the elevated implied volatility around these names, take advantage of what the market gives you. Right now, it's giving traders excellent two to four week combination strategies.