How can a pre-merger SPAC trade over $20?

[blueraincap]

A SPAC is basically a bag of cash, backed by about $9-9.5 per share, waiting to do a deal to invest into a private firm.
Now a deal is announced, the target is a strong name in a sexy industry, the SPAC holders like the name and want to stay involved and happy to pay the deal maker by getting 20% diluted.

However good the target is, SPAC is simply a cash investor + a public shell, nothing more, so if the investment deal (merger term) is more or less reasonably priced, the remaining SPAC holders will lose a bit through dilution as each share is only backed by $7-8 post-founder-share.
If the deal is slightly under-priced, the SPAC holder should break even at about $10.
If the deal is very under-priced, the SPAC holder can win by paying all the dilution bringing cash below $10.

Still I don't get how can a SPAC trade at $20-30. The deal has to be substantially under-priced by a factor of 3-4 (leaving 3x+ cash on the table) to make it pay.
Say, ABCD went public raising $1bn, has announced merging with a sexy AI firm FireAI, ABCD share trading at $25, post-merger cash is around $7/share. FireAI is valued at 10bn in the deal post-money, so original ABCD holders will own about 7%, sponsor 2%, original FireAI guys about 90%. For the ABCD shareholders buying at $25 to be above-water, the post-merger firm has to be valued above $30bn (under-priced by more 3x).

Fair enough, IPOs are often under-priced and IPOs often see big price jumps. But a target owners are private equity firms and I doubt they have as much incentive to underprice than a distributed IPO, and even then wouldn't underprice by a substantial factor.

What am I missing?

 

[guru]

I’ve got options on every SPAC that has options, and I have no idea what they are and what they do or whether they’re undervalued or overvalued. And I do so simply because everyone else does, everyone chases, everyone buys every SPAC there is, and still asks where they can find more.
Its the demand, fomo, hype, cash with nowhere to go. not wanting to be the last, future potential of being even more overpriced like everything else, people competing to buy anything and everything.
Why is bitcoins hitting ath every week? Why pot stocks, GME, AMC, etc?
People are Twitting every second about new IPOs and SPACs, while others are asking every second what they can still buy, without care for what it is they’re buying.

 

[tsznecki]

@blueraincap For real, you think fundamentals and sense matter in the middle of a bubble? Are you a boomer?

Shit, I buy SPACs because a squiggly line told me so.

 

[systematictrader]

I’ve got options on every SPAC that has options, and I have no idea what they are and what they do or whether they’re undervalued or overvalued. And I do so simply because everyone else does, everyone chases, everyone buys every SPAC there is, and still asks where they can find more.
Its the demand, fomo, hype, cash with nowhere to go. not wanting to be the last, future potential of being even more overpriced like everything else, people competing to buy anything and everything.
Why is bitcoins hitting ath every week? Why pot stocks, GME, AMC, etc?
People are Twitting every second about new IPOs and SPACs, while others are asking every second what they can still buy, without care for what it is they’re buying.

do you have a list of those that have options by any chance?

 

[systematictrader]

@blueraincap For real, you think fundamentals and sense matter in the middle of a bubble? Are you a boomer?

Shit, I buy SPACs because a squiggly line told me so.

very few recognize we are in a bubble, good points your wrote

 

[guru]

do you have a list of those that have options by any chance?

I have too many options on different companies I'd have to go through, but generally I've been using this list of SPACs and occasionally checking for changes and new ones, including checking for options:
https://stockmarketmba.com/listofshellcompanies.php

 

[systematictrader]

I have too many options on different companies I'd have to go through, but generally I've been using this list of SPACs and occasionally checking for changes and new ones, including checking for options:
https://stockmarketmba.com/listofshellcompanies.php

wow i didnt know there is that many, how in the world do you keep up and i assume you look for a large Profit before one of them catches your eye to either roll it or exit it.

For me this is too many, not platform wise, but i am a guy who can NOT stop looking even if weekly or monthly at positions held even if they long term, thus is force myself to trade only 10 instruments tops and i never open any other charts for the reason of not getting too drawn to "split-focus". Appreciate the list though, many thanks

 

[guru]

wow i didnt know there is that many, how in the world do you keep up and i assume you look for a large Profit before one of them catches your eye to either roll it or exit it.

For me this is too many, not platform wise, but i am a guy who can NOT stop looking even if weekly or monthly at positions held even if they long term, thus is force myself to trade only 10 instruments tops and i never open any other charts for the reason of not getting too drawn to "split-focus". Appreciate the list though, many thanks

Not too many of them have options yet, some have options only 3-6 months out, and some were already too expensive to start with. So I may currently have options only on about 10-15 of them, trying to get LEAPs or longest term available, so I don’t have to watch them daily, while p&l is averaging out across them. Though they’re side play for me and I haven’t been focusing on them indeed. I have a very diversified option portfolio where nothing is supposed to stems out much until it hits noticeable profit (or loss on occasion).

 

[systematictrader]

Not too many of them have options yet, some have options only 3-6 months out, and some were already too expensive to start with. So I may currently have options only on about 10-15 of them, trying to get LEAPs or longest term available, so I don’t have to watch them daily, while p&l is averaging out across them. Though they’re side play for me and I haven’t been focusing on them indeed. I have a very diversified option portfolio where nothing is supposed to stems out much until it hits noticeable profit (or loss on occasion).

Why don't you conduction your trade through vertical options to neutralize any time decay and not pay any extrinsic? and simply set alerts at a price higher for when for you to look at it to potentially roll it

i hate straight calls because the "fee" which is the extrinsic is always given up even when it becomes in the money

although verticals if not rolled you would be limiting your upside it just depends how quickly these move up

 

[Sig]

Seems the play is to set up a SPAC, do a secondary offering at a price way above the cash value of the SPAC, then just dissolve the SPAC and pay the cash out as a dividend. I always thought the old closed end funds trading at a premium to NAV should have done that too.

@blueraincap you're right, them trading at a premium before they even have an acquisition target isn't supported by anything fundamental that I can see.