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Summary of initial DD: ESSC is an optionable SPAC with perfect pre-conditions set for a gamma squeeze leading in to December monthly option expiry (Friday 17 Dec). The tradeable float has been reduced to 341,131 shares due to redemptions and a forward share purchase agreement. Not only is the tradeable float the lowest seen so far out of the SPAC redemption squeeze plays (roughly 5 x lower than IRNT – which hit $47.5), the NAV floor protection is still in place. This means that you can redeem your shares for $10.26 once the merger vote has been announced, or you will be refunded for $10.26 per share if the SPAC reaches its termination date on the 24 Feb 2022.
Link to 1st updated DD:
It’s been a wild ride so far. Within minutes of posting my DD, a relatively small amount of volume started the initial rapid rise in share price from around $10.5 to above $12, before settling around $11.5 as volume dwindled. Another burst of volume later in the day at around 2:40 PM sent share price flying upwards to above $12.5, before again settling around $12. The following day, at around 11:30 AM, another burst of volume sent the share price up, to again settle around $13.5, with a few peaks northwards of $14. At around 2PM, shares dropped rapidly in 10 minutes, before settling near $11. Volume the next day was low, but the shares held in the region of $11 before creeping up towards the end of the day.
The price action of the stock raised four questions:
1) Is the free float really 341,141 shares?
2) Why were there such obvious sell walls at $11.5, $12 and $13.5?
3) Why did bursts of volume break through these walls?
4) Why did the dam break?
5) Is the play still viable?
I think the questions are all linked, and I have collected my thoughts in an attempt to answer them below. This is a unique situation, with some known unknowns, and some unknown unknowns. Here are my thoughts:
The free float question is easy to answer. I have seen no information yet to dispute the initial calculation. I want to highlight another part from the SEC filings – a sentence from page 4 of the DEFRA 14A filed on 15 Nov 21:
‘’ the amounts being paid to each of the Backstop Investors reflect the risk that they are each bearing by agreeing not to redeem their shares in conjunction with the Extension and the Business Combination and to instead hold such shares for a longer period of time, allowing such shares that they each hold to potentially become a part of the public float of the post-combination company for a period of time following the Business Combination, and therefore, is higher than the estimated per share redemption price of $10.26.’’
The shares that they hold will not become a part of the public float until after the business combination. I think that’s fairly clear.
There’s no way to tell the uniqueness of traded share volume. High-frequency (HFT) Algo-traders can quite comfortably respond to directional pressure and trade between price channels e.g. short selling at 13.6, buying back at 13.5, rinse and repeat. MMs use this to create liquidity, which would explain the price and volume action on ESSC fairly well. This would increase the daily volume well over the total volume float. Rapid increases in volume can break through these channels, leading to delta and gamma hedging from MMs; and with the tight position controls in place cause the short positions to cover – driving the price up in to the next channel before the process repeats. Hence why the volume can be so much higher than the float.
If we look at other squeeze plays, the total volume of the float is often traded times over – for instance, according to FINRA, the highest volume on OPAD was 61.91m on the 16 Sep 21, on a roughly 3m float. Short volume was also 17.79m. This was the day before the September monthly option expiry. It’s a similar picture for IRNT. For ESSC, there will also be short volume on the free float. Frustratingly, short interest (unsettled short positions) for November end-of-month will be known shortly – but this will be before the volume spikes we saw. Mid-month (15 Dec 21), will not be known until after Dec option expiry. So this will be a known unknown for this play.
Whilst there is nothing specific written against the backstop investors lending their shares, the following condition in the forward share purchase agreement (page 1 of the DEFRA 14A dated 15 Nov 21, also found elsewhere in the document) precludes them from doing so:
‘’pursuant to which the Backstop Investors agreed (x) to maintain a “net long” position and not seek redemption for an aggregate of 2,923,974 public shares of East Stone from the period beginning on the trading day immediately prior to the Special Meeting through the end of the trading day on which the Special Meeting is held, and from the period beginning on the trading day immediately prior to the Business Combination Special Meeting through the closing of the Business Combination, and (y) to vote such shares in favor of: (a) the Extension Amendment Proposal and (b) a proposal submitted to East Stone’s shareholders to approve the Business Combination’’
This is because the investors that retains voting rights for corporate actions is the registered owner of the security, known as the holder of record. The short seller is never the holder of record, as he has borrowed the shares. Whenever the shares are sold short, the initial source (in this case the backstop investor) loses their voting rights, as they are no longer the holder of record. The investor who purchases these shorted shares is the new holder of record and thus controlling the voting rights. This would break the conditions of the agreement. The net long aspect of the sentence allows the backstop investors to box the founder shares that they will receive as part of the agreement (boxing in this case would be to short the equivalent number of shares that they will receive, 399,996 shares total, and cover this short position with the founder shares once they are received post business combination – locking in the current share price). It also allows for them to box most of the remainder of their positions with put options (as these are a short position). The interesting part of this, is that in order to box their positions, the backstop investors would need to sell short an equivalent amount of shares. However, there are only 341,141 shares of the free float – so once boxed, to the extent that they can, these shares would no longer be possible to short. This would lead to an interesting dynamic where liquidity would be constrained as HFT algo trading would be impossible, which would also reduce the ability to counter upwards pressure, further facilitating any squeeze dynamics.
Q4: I think the real answer is simple, panic. Whilst the HFT algo trades were being executed to provide liquidity and counter upwards pressure, they weren’t aggressively short selling. One large, aggressive short sell, conducted simultaneously with a large purchase of puts caused a large instant drop on the small float (possibly triggering an instant MM short-sell to delta and gamma hedge), swiftly followed by panic selling until we reached consolidation at around $11 per share.
Q5: The play is still viable. There will be periods of consolidation, as we saw on Friday, and also periods of volatility due to the effect of the small float. The OI on the option chain has significantly increased, which means better conditions for a gamma squeeze, and the NAV floor is still in place. Any increases in volume will have an even larger effect. If the backstop investors have boxed in any of their founder share positions, then short-selling will be further restricted.
This is still the only viable squeeze play with a safety net, and is the best risk/reward squeeze play available. I want to remind people that common shares are the only security that offer the NAV safety net (edit: this does not include derivatives). Good luck to all.
I am still in with my full position. I am long 30,000 shares @ $10.4 average, and 1000 Dec 12.5c at $0.2 - total risk = 7.2% of position.
DISCLAIMER: I am not a financial advisor, this is not financial advice.
ESSC investor presentation:
ESSC SEC filings: