Betting on Bill: A SPAC play with a margin of safety (PSTH)

While froth is coming out of the SPAC market, PSTH calls may offer an opportunity to buy when there's blood on the streets for limited downside risk.

NOTE TO READER: This is an example of what a paid post will look like, starting, well, after this post. Other paid posts may certainly be longer if it’s talking through a more fundamental idea. But for more tradey ideas such as this, I’ll try to keep things pretty succinct, I know y’all are busy.

SPACs have taken a beating along with the general market over the past week or so; from the post-acquisition $CCIV to Chamath’s quiver, pre- and post-acquisition froth in SPACs has moderated significantly. It is, of course, still quite frothy - as of the March 3rd close, PSTH closed at $27.68, a juicy 35% premium to NAV.

This may be naivety from a bear turned temporary pretend (?) “nothing matters” bull, but I think Bill is worth betting on and I think I’ve found a pretty compelling way to do so.

While PSTH has pulled back ~20% from ~32 to ~27, ATM and OTM options prices remain elevated due to faith in Bill getting a big deal done. There are hints that it may happen sooner rather than later (e.g. PSTH II has been registered), but that does not matter all that much for this idea.

The general idea:

Medium-term calls that should pay in situations other than 1) a total collapse of all financial markets (and even that should provide a margin of safety as there is the $20 NAV to pin to on a long enough timeframe) and 2) Bill doing a dumb deal (detailed further below).

The specific idea:

A December 2021 long $15 / short $25 call spread for about $5. (I filled this trade at $4.90 today, at $13.78 for the $15 and $8.90 for the short $25).

The rationale:

This essentially provides a synthetic and leveraged long on $PSTH at $20, something not possible unless you were a blessed Tute that was able to buy at the IPO price. And I think being long PSTH at $20 is a safe enough bet, despite the recent turmoil in the SPAC market. I mean, this spread is already fully in the money with 10% on top, and buying at NAV should be a relatively safe bet… I think.

Here’s how I see things potentially playing out:

Bull case: Bill locks down the long-rumored Stripe or another unicorn-whale, shares moon, turn $5 into $10 in a year or less.

Base+ case: Bill doesn’t do anything between now and the end of the year, but due to this being an A+ SPAC, shares still mosey on somewhere in the 20s. Likely a positive return of some kind (and we have $7 or 30% to go before we’re at breakeven, which again, is NAV).

Base- case: All of the froth evaporates from the SPAC market. PSTH melts down to $20. Capital was deployed for a year and nothing comes out of it.

Temporary bear case: Complete meltdown in SPACs and this trades below NAV for some time. Nothings impossible, but not likely IMO.

Permanent bear case: Bill picks a target that the market hates. I’m worried about the Subway rumor, personally. Even if I was on a road trip and Subway was the only option available, I think I’d rather eat stale beef jerky and candy from the gas station convenience store rather than eat at the attached Subway. While there have been admirable fast-food turnaround plays (Arbys), I personally think Subway is hopeless. Lets hope Bill has better sense than that, because that is the one case where I think PSTH could trade below NAV after announcement/consummation. Maximum downside in PSTH could very well be $15 so this idea could conceivably go to $0 if he really messes up.

One could certainly structure this idea differently based on risk tolerance. I like the $15/$25 since the breakeven is essentially NAV, but upside is limited to 100%. But of course there are other structures available (which I own as well) if you think Bill is going to hit a home run:

• 15/25: $5 cost to potentially make $10, PSTH $20 breakeven

• 15/30: lets call it $6 cost to potentially make $15, PSTH $21 breakeven (ok probably should have picked this as the main idea to profile)

• 15/35: ~$7 cost to potentially make $20, PSTH $22 breakeven

• and on and on…

There is one other point worth mentioning, which people more financey than I have brought up as I have mentioned trades similar to this on the Twitter feed: because of PSTH’s tontine (I am triggered every time I read that SAT word) structure, people are going to want to own the shares (because you have to own them at a certain time to get the warrants) if/when a merger happens, which may result in the short call getting called back (it’s never happened to me, so take all of this with my normie grain of ignorant salt). I guess that adds uncertainty and the potential for unintended exposure (waking up one morning long the lower call without being short the higher call), but if anything, when this theoretically starts to happen, I would think that the IV/time value would evaporate from the higher short calls in a more favorable way than from the lower/more ITM long calls, so I’d think it should not be detrimental to the overall trade. But, again, I’m not sophisticated enough to opine on the mechanics, and as always, all of this is never advice.

So to wrap this up:

I think this is a great risk/return at this moment in the (crazy, pumpy, yet temporarily deflating?) SPAC environment. Buying PSTH on leverage at $20/$21/$22, with a year’s timeframe, with 100-300% upside and (in 90% of situations, in my opinion) limited downside, is a pretty attractive idea.

Thanks for reading, and happy to hear your thoughts in the comments. If you liked this post and found it valuable, please feel free to subscribe as I have a couple more of these in the hopper that I’ll drop soon (and those will be behind the paywall).

Kind regards,

Elmo