Thank You Nikola Motors and VectoIQ

My little group of warrant traders have feasted on the VectoIQ trade the past few days. We had been in the warrants since before the acquisition announcement, picking them up at $0.80.

We then sold on the announcement of the acquisition, a common pattern, and waited for a good re-entry.

That came over the last week, when we locked in again on the pattern, story, and technicals.

Pattern

There are many patterns in the lifecycle of a SPAC. One is the pop in the warrants, and often common, at acquisition announcement.

Another, and the one important here, is a move higher in the stock as it gets introduced to the analyst community. VTIQ has just begun its roadshow, giving Wall Street its first opportunity to examine the company.

Story

If you’re reading this, you probably know the story already. VTIQ is purportedly, the next Tesla (TSLA). Maybe yes, maybe no, don’t really care.

But, the story is GREAT. Here’s what Wall Street and main street are reading about the company.

So we have a sales team kicking into gear with a great story to tell. Now all we needed was the re-entry point.

Technicals

The stock had rocketed higher, along with the warrants, so we were looking for a pullback.

These are not easy pullback plays because we don’t have much of a chart history. But, $13, the open of the gap up on 4/27, looked to be a good place to start looking.

It held there for three days (4/30, 5/1, 5/4), about as much basing as we can look for on a chart like this. So, I made the call that this was the point to reload.

We finally had our combination of pattern, story, and technical entry.

The more probabilities you can put in your favor on each trade, the better.

Next action in the warrants

If you haven’t noticed yet, the warrants are now starting to stall just a touch as the common moves to $18. Why?

As with Virgin Galactic (SPCE), the most recent similar play we did, we’ll get a similar pattern. The Virgin warrants had a big premium, then went to parity, and then to a discount as the stock blew through $20.

This can play havoc with arbitrage plays, like owning warrants and shorting calls, so you should be aware of the pattern.

Because the warrant has an $18 call provision, as the common gets to, and holds above $18, the warrant goes from a 5 year warrant to a two month warrant. And, as an unexercisable warrant, the discount can open up as the stock runs.

Something you’ll definitely want to know if you’re trading the warrant, and especially options against the warrant.

If you’ve ever had an interest in trading warrants or SPACs, give us a shout at The Warrant Observer.