How to Trade SPACs with Options

How to Trade SPACs with Options

This year has been SPAC-tacular!  Although SPACs have been around in various forms for a quite a long time, they have really taken off over the last 2 years.  Look at the growth:

  • 2019: 59 SPACs created with $13 billion invested
  • 2020: 247 SPACs created with $80 billion invested
  • First 6 months of 2021: 359 SPACs created with $95 billion invested

What is a SPAC and How do they Work?

A SPAC is a Special Purpose Acquisition Company, often called a blank check company.  Its purpose is to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with a yet to be determined company.  Although the founders or sponsors may have expertise in certain industries, at launch, the SPAC does not have any commercial or business operations of its own and most likely doesn’t have any publicly disclosed acquisition or merger targets. A SPAC’s only assets are the funds raised through the IPO.

The funds raised through the SPAC’s IPO are invested in an interest-bearing trust account.  The SPAC then usually has two years to find an acquisition or merger partner.  The SPAC either finds an acquisition in the two-year period or returns the funds to the investors.

What are the Advantages and Risks of a SPAC?

SPACs offer at least two advantages to companies that are planning to go public:  they can go public faster than a traditional IPO and they may be able to negotiate a premium price because the SPAC has a limited time frame to invest.

SPACs can be a riskier investment as the investor is betting that the founders will be successful in finding an acquisition.  There also tends to be less regulatory oversight (although that is changing) and disclosures relative to a traditional IPO. 

How to Trade SPACs through Unusual Options Activity and Wall Street Wiretapper™

Considering the lack of disclosure and information about a SPAC’s acquisition targets and the number of SPACs trading, how do you know which ones to target?  In a word (ok, nine words) – Unusual Options Activity identified by Wall Street Wiretapper™.  If you’re not familiar with Wall Street Wiretapper, it’s a brilliant AI-driven unusual options activity scanner that learns and quickly identifies unusual options activity opportunities.

Let’s take a look at an example.

VPC Impact Acquisition ($VIH) went public in September 2020, raising $200 million by offering 20 million shares at $10.  They announced in January 2021 that they would merge with BAKKT in a deal valued at $2.1 billion.  The merger was completed and $BAKKT started trading on October 18th.

Unusual options activity in $VIH started showing up on Wall Street Wiretapper in the first two weeks of October indicating that actual volatility was going to outperform the implied volatility priced into the options:

Wiretapper was right on!  As VIH and BKKT merged and started trading as $BKKT, the stock exploded.  $VIH closed at $9.78 on October 11th and $BAKKT closed at $42.52 on October 29th

Well…all that looks good in hindsight but is there a real-life trade example…. absolutely!!! A Masters in Trading member took a trade on October 12th based on this exact information.  He bought $1,000 worth of options (November 19th expiration 7.5 put/12.50 call unbalanced strangle – buying 2 calls for every 1 put purchased for a total premium of $2.02):

He ended up making over $14,000 on his $1,000 investment! From the Masters In Trading Discord room:

Wall Street Wiretapper strikes again!

Unusual Options Activity Consistently Drives Great Trades

Identifying unusual options activity through Wall Street Wiretapper is a great source for a variety of consistently successful trades – earnings, SPACs, sector rotations, corporate actions, etc.  Wiretapper is an important starting point in finding great trades.  Make sure you do your own research and trade within your risk parameters.  Gain the confidence you need in your methodology through paper trading before committing real, hard-earned money!

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