Betting against former president Donald Trump’s social media startup is one of the most difficult and expensive short trades in the market, according to financial analytics firm S3 Partners.
Investors tempted to bet against Trump Media & Technology Group are facing annual financing costs to borrow the shares of more than 150%, and risks that the stock’s meme-like volatility and loyal fanbase could burn them even more. The newly-public company is the most expensive stock to bet against, with over $100 million of short interest, S3 data shows.
The short trade is expensive in part because there’s a tiny amount of shares available to borrow and strong interest in betting against the company as shares hold onto gains, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
“With short sellers staying in this trade even while paying over 200 times the average stock borrow rate for a U.S. short trade, and over 300 times to short” a company like Apple, a lot of people are betting that a significant near-term decline in Trump Media’s stock price is due, Dusaniwsky said.
But so far, it’s been a losing bet. Tuesday’s surge alone has cost short sellers some $61 million on paper, bringing mark-to-market losses to $158 million this year for the investors who piled in to bet against the blank-check vehicle that took Trump Media public, according to S3.
SPAC stock borrowing is particularly tricky because long-oriented shareholders such as mutual funds and ETF providers — the source of much of the stock available for lending — often don’t have large SPAC positions.
Investors looking to bet against difficult-to-short stocks may buy put options as an alternative, to profit if shares fall back. Options contracts on Trump Media were flying on Tuesday, with the volume of both puts and calls at noon more than five times the full-day average over the past 20 days, data compiled by Bloomberg show. Among the most actively traded contracts were $30 and $50 puts expiring Friday.
Meme stock run
The stock jumped as much as 59% in Tuesday’s debut on the Nasdaq after the deal to take the unprofitable company behind Truth Social public capped an eye-popping meme stock run, and provided a paper windfall for Trump as he faces a mounting series of legal and financial woes.
A market valuation of more than $9 billion contrasts with Trump Media’s fundamentals — it has so far struggled to generate a profit, losing $49 million in the nine months through September while delivering just $3.4 million in revenue.
Even so, experienced investors are mostly opting to stay away, according to a straw poll of five activist short sellers.
“I would not go near it,” said Anne Stevenson-Yang, co-founder and research director of short seller J Capital Research. “This is a crazy meme stock that’s pumped by Trump fanboys.”
Trump is tangled in a web of legal troubles that could result in a series of damaging trials and judicial rulings on top of massive damage awards as he campaigns for the White House.
He faces four criminal cases, including two alleging he conspired to overturn the result of the 2020 presidential election, plus two civil damage awards levied against him this year exceeding half a billion dollars.
Trump’s biggest financial threat stems from a $454 million verdict against him in a civil fraud suit for inflating the value of his assets by billions of dollars a year. He was ordered to pay a reduced $175 million bond by April 4 while he appeals, but he’ll be on the hook for the entire $454 million, plus interest, if his appeal fails.
As the deal became a political lightning rod, retail traders embraced Trump Media and its stated mission to fight against big tech companies like Meta Platforms, Netflix and Elon Musk’s X, even as the merger’s winding multi-year path to completion triggered a wave of skepticism from most of Wall Street. The meme-stock trading crowd has helped power shares higher, touting the gains across Trump Media’s Truth Social platform and Reddit’s WallStreetBets forum.
“It is perhaps the quintessential meme stock,” said Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law. “It will be volatile, and its volatility will be a function of Trump’s behavior and prospects at least as much as its fundamentals.”
Bailey Lipschultz, Bloomberg , 2024-03-26 20:33:04
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