RUMBLE: Rumble Jumble
No need to mumble. This trade could be our first multi-bag.
Do we need free speech when risk-return is at one-twenty?
When dilution is written all over your face, you don't qualify for valuation.
Mamma Mia. This will end in credit play.
1. Why Do I Care Right Now?
When I saw Rumble working its way up into my liquidity minimum and volatility maximum, my first thought was: why not? I can elaborate on free speech and its function in human society. Reality kicked in fast. Lack of credentials plus MacroDozer with a strict no-BS, all-profit policy. Let’s see what happens in the Rant Around section.
In addition to illiquidity and wide bid-ask spreads, a significant risk in structuring products with derivatives on companies recently SPAC-merged is a free-falling price beyond any standard deviation’s imagination, far below the initial business combination price of ten dollars. There is not enough trading history to analyze the relationship between current implied vs. last twelve months’ implied vs. actual historical volatility. Hence, it isn't easy to objectively declare option prices to be over or undervalued.
However, we know that there are erratic forces at play, be it retail investors gambling away or insiders raising cash or trying to exit. Some early investors, including venture capitalists, private equity investors, sponsors, or SPAC and PIPE investors, love to raise some money or exit entirely within the first weeks or months post business combination. They usually got in for a fraction of the initial listed price and are profitable far below par.
Strategically involved stakeholders like founders and directors have lock-up periods for most of the shares they own and are not allowed to sell until a specific price target or deadline has been hit. It is not part of the free-float (yet). However, once cleared, money-printing superpowers materialize. Registered shares, often five to ten times the free-float, can be puked into the market only to fill private war chests, not so much the business cash balance. Shareholder dilution in full force.
To manage price pressures, the CEO and stock promoter must be gifted with how to rally the masses and please the hopes and dreams of the retail investor. Of course, a sexy investment story helps, and a debase from reality is possible.
Valuation does not matter at this point, money flow matters.
If you are used to reading long-winded legal documents and analyzing detailed financial reports, and if you are not shying away from studying constant amendments, updates, and footnotes in a series of multi-hundred-pager documents full of mistakes, you might be able to predict the severity and timings of these share price pressures. So we did some reading and skimming, enough to tell that the dilution party at Rumble is real.
The estimated free float is 30 million shares (the public SPAC shareholding) plus 7.5 million when the SPAC warrants are converted. As long as the share price exceeds 11.50, these warrants can be exercised for profit.
An additional 25 million shares will hit the market over the next weeks and months, consisting of 8 million more warrants, 8 million PIPE investor shares, 8 million converted and not restricted old Rumble Canada shares, and approx. 1.5 million sponsor forward purchase contracts.
When this is all digested and over, and the share price can trade above 15 for longer than 20 days, another 300 million shares will be freed up six months from business combination, otherwise twelve months.
Mamma Mia, Jesus Christ, Holy Dilution. You decide.
2. Useful Background Information
Rumble tries to protect or restore a free and open internet by creating an independent video-sharing platform immune to cancel culture and censorship beyond democratic constitutions. We will see. The fact that Rumble is officially blocked in the country I am writing this from indicates that something is rumbling.
Rant Around Online Censorship
I care about YouTube. Endless knowledge, innovative packaging, and reliable tech are truly mind-blowing. However, centralized and ideologically motivated rules and guidelines on what I can see or what creators can or cannot say; not so mind-blowing.
Within the legal frameworks of free societies, the basics of human thinking, innovation, and progress are based on free discourse and free information flow without fear of punishment. We need a lot of that to solve 21st-century problems, and we certainly do not need to feel mentally oppressed or thought-policed.
More radical or offensive views, although often in the minority yet disproportionately noisy, need to be freely available and part of the overall discourse. Don’t move them underground, therefore difficult to access and oversee. Instead, opposing ideas should be in constant dialogue. So they dance, battle, and potentially die off but hopefully give birth to something new and superior. More unity shall follow.
Let’s come up with something better than cancellation or banning. Let’s develop mechanisms and algorithms that make sure majorities can decide on right and wrong and potentially get inspired by X to initiate Y giving birth to the unexpected Z.
3. Trade Execution
This trade could be our first multi-bag. The options at around 10 are so expensive that we get the hedge for free. The credit is 4.00, which would mean no risk at maturity. However, we got filled at 3.80, so we manually adjusted the price in the pay-out graph below. With a 3.80 credit, the risk-return is 1 to 19.
We are selling a bearish risk-defined straddle at 10, with wings at 6 and 14, maturity Dec 16, 2022.
Break-evens are at 6.00 and 14.00.
3.1 Trade Entry - Nov 8, 2022
Total: 3.80 Credit.
4. Final Comments
Expect updates on BrainDoζers within 4-6 weeks. We use the exact heading, ending with (+/- xy%), and label the cover cartoon with a red Doζed stamp. That way, the performance will be easy to follow.
We are not sending BrainDoζer updates via email unless you specifically ask for it here. We want to keep the information flow light and to the point. You can still freely access all updates on MacroDoζer the moment they are released.
My name is Juri von Randow. You can find me on the top banner to the right. MacroDoζing, as if there was no tomorrow. (Email version only.)
Feel free to share. Sincerely.