The Squeeze on GOVX is Here After Major COVID Vaccine News - Buy the GOVXW Warrants

Back in June, we announced our four top microcap short squeeze picks to try to take down notorious small cap manipulator Sabby Management. They were Alfi, Inc. (ALF), BriaCell Therapeutics Corp. (BCTX) (BCT.V), 1847 Goedeker Inc. (GOED) and GeoVax Labs, Inc. (GOVX). Wallstreetbets censors DD on microcap stocks so we did our write up here instead. Please read these reports for background on the short squeeze thesis. 

https://wallstreetbetsreddit.blogspot.com/2021/06/the-four-microcap-stocks-to-cause.html

ALF and GOED were the big winners with shorts taking massive losses on both at the time. While BCTX has been up and down, GOVX has been mostly overlooked and the last stock to really have death knock on the shorts' doors. But this evening's major news could change all that. GeoVax Presented COVID-19 Vaccine Data at the European Society of Medicine (ESMED) General Assembly. The GeoVax Vaccine is being developed as a universal vaccine to address evolving SARS-CoV-2 Variants. The stock reacted very positively to this news, shooting up to $7 on 10 million volume after hours. To put it into perspective, GOVX has only 6.3 million shares outstanding. A $100 million market cap leads to a stock price of around $15. 

One thing that people were confused about is how can GOVX have so much volume but barely move? The stock traded 11 million shares during normal trading hours but moved up only 7% to $4.30 before adding another 63% after hours. Simple, the stock has warrants and the hedge fund shorts use their inventory of warrants as insurance as they relentlessly short the stock. If you want to get the stock to squeeze, buy the warrants out of their inventory. Here is an excerpt from the June 20th post that outlines the reasons for wanting to buy the warrants:

Buy the warrants, create a squeeze

Another thing that these stocks have in common is that they all have warrants. The symbols are ALFIW, BCTX, GOED.WS and GOVXW. Warrants function very similarly to call options in that they are the right to buy a stock at a set price and that funds use them to hedge so that they can short the stock. The differences between warrants and calls are that warrants have a limited supply and that they generally have much longer times to expiry. These ones all expire in 2025 or later. This makes them very good to hold. If you buy short term options and the stock price moves against you for a few weeks, you lost most of your money. On these warrants, even if the stock price does nothing for a few weeks, you still have lots more time. 

Since there are a limited supply of warrants, if the public were to buy up a fund's inventory, that fund would get nervous and start covering their short sales on the stock since they no longer have the warrants to hedge. That would put buying pressure on the stock. This is similar to the gamma squeeze theory by using call options. Some might say that the call option impact can be much greater, but keep in mind that those types of gamma squeezes are on stocks with much larger floats. These four stocks have floats of less than 10 million shares. It won't take that much to cause a gamma squeeze.

We would like to focus on last Wednesday's trading of two of these stocks in particular. BCTX and ALF to illustrate the effect..

BCTXW has a strike price of $5.31. That means a warrant holder can purchase BCTX shares by submitting a warrant and paying $5.31. Therefore, BCTXW should be no lower than $5.31 below BCTX's stock price, or else there is arbitrage by buying the warrants, shorting the stock, exercising the warrants to close off the short and pocket the difference. On Wednesday, BCTX reached a high of $7.58. Therefore the warrants should have had a high of $2.27, but they had a high of only $2.15. 

ALF and ALFIW was even more extreme. ALFIW's strike price is $4.57. ALF hit a day high of $9.22. Therefore the warrants were worth $4.65 at the time it reached the day high. The high of the day on the warrants was only $4.00, $0.65 below their intrinsic value. Some of this can be explained by the relative illiquidity of the warrants compared to the stock, but not enough to explain a $0.65 variance. 

What was going on here? The stocks were getting into gamma squeeze territory. What the funds try to do is get people to sell or short the stock and buy the warrants, taking advantage of the arbitrage. This works to alleviate the buying pressure on the stock. But it can only work so long as the funds have a limited supply of warrants to work with in order to continue to play their games with no or reduced risk.

How do you stop this? Buy up the warrants, especially while the stocks are running. The warrants are in the hedge funds' inventory and they use them as hedges in order to aggressively short the stock. Even if the stock goes upwards, they can use their warrants to purchase the shares back at $5.31 or $4.57 instead of covering on the open market. If the inventory of warrants are bought up and held by retail shareholders, the funds would no longer have that insurance policy. They would get nervous and be forced to cover, enabling the squeeze. This is a similar kind of theory to buying up call options to try to start a gamma squeeze on large cap stocks. Since none of these four microcap stocks have options on them, hedge funds don't have any alternative route to try to create synthetic shares. They will have to cover quickly. 

The other obvious advantage of buying warrants are their leveraged upside. Of course, this applies to downside risk as well, but since there is so much time until expiry that's not such a huge concern in 2021.  This is a chart of the stock,  the warrant symbol, the strike price, the price of the stock if it were to double, the warrant value (defined as stock price less the strike price) and the percentage the warrant would gain if the stock was to double.

When the stock price doubles, the warrants triple in price or more. And because there is so much time to expiry on all of them, they don't have much more risk than the stock. Yes they could expire worthless in 2025, but 2025 is four years away. Most investors won't be holding for much more than a year.  

The leveraging effect on ALFIW warrants versus the stock became apparent. As the stock ran from $8 to over $20, the warrants ran from $3 to $15. GOVXW can do a similar kind of move if GOVX pops to over $10. GOVXW's strike price is $5 so if the stock price goes to $15, the warrants will intrinsically move to $10, approximately 5x upside from the after hours close.