You need a lot of money – and courage – to take short positions Trump media currently in stock.
Trump Media, which began trading publicly last week, is now by far the most expensive U.S. stock to sell short, according to S3 Partners, a leading financial data marketplace platform.
However, many people are still willing to pay this high cost because they expect Trump Media’s stock price to inevitably fall dramatically from Wednesday’s closing price of $48.81.
Investors who wanted to borrow Trump Media shares to sell short on Wednesday would have had to pay annual financing costs of between 750% and 900% of the share price, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
That means a short seller of the DJT ticker who took a position on Wednesday had to pay costs of between about $1 and $1.22 per day to lenders.
To break even on a new trade after one month, a short seller would have to see Trump Media’s stock price fall by more than $30.
That could be a difficult situation, considering that many of Trump Media’s shareholders are individual investors, driven by their support for former President Donald Trump, the company’s majority shareholder and the most prominent user of its Truth Social app are motivated to buy the stock.
Investors who began shorting Trump Media before Wednesday are paying less in costs that are collected at the end of each month, Dusaniwsky noted. But not much less.
Existing short positions in Trump Media were paying costs of 565% a year on Wednesday, he said.
For comparison, the average equity borrowing cost for a short position was just 0.71%.
“It’s the most expensive stock loan,” Dusaniwsky said of Trump Media. “Every day the stock has to fall 78 cents just to offset the financing costs, just to get you to zero.”
“People are expecting an extraordinary price drop in an extremely short period of time,” he said. “If you’re talking about holding your stock for a month, the stock has to fall by more than half for that to be profitable.”
Dusaniwsky called the financial cost of shorting Trump Media “extraordinarily rare.”
“This is a ‘black swan’ event,” he said. “As something that is a legitimate trade, this is completely off the charts.”
The second most expensive stock sold short on Wednesday was Canopy Growth, whose short sellers paid costs of 198% of the share price per year, according to data from S3 Partners.
Short sellers of Beyond Meat, the third most expensive stock after short selling costs, would have paid 79% annually.
Short sellers are essentially betting that the price of a stock will fall below the price at which they borrowed the shares and then sold them. If the price falls, they can buy shares to give back to lenders and pocket the difference in price.
However, if the stock price rises, they may find themselves in the unpleasant situation of having to buy shares and losing money at the trader or increasing the collateral they put up to hedge the trade – a “short squeeze”.
As of Wednesday, short interest in Trump Media – or the value of shares borrowed for short trades – was about $255 million. Many of these short positions were in Digital World Acquisition Corp. acquired, the publicly traded shell company whose merger in late March with Trump’s social media company led to Trump Media going public.
In March, short sellers’ positions in DWAC and then Trump Media fell by about $126 million in so-called mark-to-market losses, down nearly 70% for the month.
Despite this, and despite Trump Media’s high shorting costs, many investors are interested in doing just that.
They’re drawn to the fact that the stock price gives the company a market cap of $6.6 billion, even though it only had revenue of $4.1 million last year.
“What I hear on the street is that if [an amount] “As the number of shares becomes available, short sellers decrease,” Dusaniwsky said.
When Trump Media went public last week, its price shot up more than 50 percent to a high of $79.38 per share within the first few minutes of trading.
But on Monday, its stock price plunged 21% after Trump Media reported a loss of $58 million in 2023.
Dusaniwsky said Trump Media short sellers got into these trades because “they think this stock is overbought” and that there is a real opportunity to make money on a dramatic price drop.
These sellers are “hoping to make a return of over 20 percent on this trade,” meaning the stock price would have to fall as much as 70 percent to cover the financing costs of the trade, he said.
The investors who can borrow shares from their brokers to short Trump Media are “good customers” of those brokers, he said.
“If stock lending becomes so difficult, only the best customers will get it,” he said. And the best customers are those who have stock reserves or other collateral to back their positions, he added.
However, it is becoming increasingly difficult to borrow stocks to sell short. Of the approximately 5 million shares of Trump Media available for short sale, 4.94 million are already borrowed, driving up financing costs.
“This is now a elusive stock because the short sellers are losing money, the interest rates are so high and there’s also a callback risk,” Dusaniwsky said, referring to a situation in which a broker has to purchase shares from a short seller in order to sell them sell A client in a long trade position who originally purchased the shares on margin.
Dusaniwsky said short sellers are in a difficult position because many Trump Media shareholders are in no mood to sell their shares and drive down the price, and because there are so few stocks to borrow and sell short.
— Additional reporting from CNBCS Nick Wells
Source link
2024-04-04 03:42:05
www.cnbc.com