I don't understand why someone who would go long the T-Meds would then turn around and short the stock and I don't understand how that is arbitrage. I don't understand this logic. Can you explain your theory?
I get that the people who bought the TMEDs could short the stock and have already effectively covered at the higher price but why would anyone do that. If you short the stock down here around 3 but you bought the TMEDS at a 4 to 5 range then you are guarenteeing that you would loose money because you have effectively covered your short at a higher price (the cost of the TMEDS). You want to cover your short at a lower stock price or hope the company goes bankrupt so not sure exactly how this logic works.
From a May 15th post soon after tMeds were issues.
Re: You Guys Having Fun?
by votingmachine . May 15, 2012 4:50 PM . Permalink
Thanks. The part that was confusing to me was it almost sounded like the $25 was split into $4.075312 and $20.924688. Then I wondered if the contract to receive shares was 5.3879 times the $20.924688 part.
The fact that the contract for shares is for $25 of shares makes the split a bit misleading. The convertible part of the tMED is $25 and the Note part is $4.075312.
The smartest way to play the tMED's is to buy the tMED and then short 4.5855 shares at a price over $5.45 (against the box). That way you get the tMED free. You cover the shares with the conversion. And since tMED buyers are all potential shorts at $5.45, the price is going to be capped.
It is tempting to try that. The price was $5.5 before all this fell down. Any short at any price that nets $21 will turn the investment into an 11.68% return. So a short against the box at $4.80 gets you $22, and the note portion costs $3.
And if the stock price is under the $4.65, you get a bonus 0.8 shares at conversion after covering the short.
From a pure gain point of view, the common stock is probably a better bet. But from a hedging to lock in a decent gain point of view, the tMED's have some nice features.
I understand what this person wrote I think. It was written when the stock price was like 5.50 and maybe at that time it made sense. The stock is now $3.18. The Tmeds and stock trade in parity in the market so arbitrage would be difficult I would think.
I see the 28 million shorts as a potential short term catalyst. If they went short at 6, 5, or 4, they would now be thinking about closing our their short positions to lock in the capital gain, although I guess theoretically, they could just initiate a new short position immediately after closing out the profitable position so that they will pay lower capital gains tax this year. I don't see how the TMEDS decrease the likelyhood of a potential short squeeze in any way. Even if the TMED owners are the ones who are short the stock and hedged both ways, I would think after this last capital raise and reduced risk that they would be closing out those short positions and hanging on to the TMEDS. I think that is why the stock price is trending up since the $350M was raised. Not as fast as I thought it would but I think this slow steady climb will continue until the shorts start to cover and then there will be a spike in the share price due to the short squeeze.