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This post on GGPI is a follow up to the one I created over the weekend. A blog post on Seeking Alpha with a target of $35 put forth a straightforward fundamental argument for going long GGPI. Polestar sold and delivered 10,000 EV cars so far in 2020 with expectations to deliver 29,000 on the year. This compares very well to RIVN, FSR and LCID which have delivered only a handful of vehicles and have very little revenue at this time. Despite Polestar being far ahead of these other recent EV IPOs, its market cap sits at just a fraction of RIVN and LCID.
In addition to that, GGPI's exposure and meme stock status has increased as some in-depth DD on Wallstreetbets has gotten positive feedback. Refer to that post for additional information on the stock. I think the reasons for being long are quite apparent here.
My focus is going to be on the gamma squeeze potential of GGPI through increased demand of call options, especially as the merger date nears. This is the latest screen shot of call options outstanding for December and January from Yahoo Finance. Below each month is the screen capture from my previous blog for easy reference.
Volume has been robust over the past several days, and open interest has increased for calls. Despite the stock price remaining steady, the OTM calls have dropped in price as the implied volatility has decreased. This is an ideal time to buy calls as they are now cheaper while the fundamentals driving a potential squeeze improves.
There are a combined 43,940 call option contracts open at the $10 and $12.50 strikes for December and 77,420 for January. December open interest on in-the-money calls has been flat, but there was an increase in January, driven mainly by $10 calls. Adding in the small amount of open interest at $7.50 strikes and below, if the funds that are writing these contracts are trying to remain delta neutral, this is over 12.2 million shares locked up in call option contracts that are reasonably expected to expire in the money over the next two months. That's a massive amount of the 80 million pre-merger shares outstanding on GGPI.
The big jump has come from the $15 calls. There are 37,194 call options open between the December and January expiries, a more than 4,000 increase from the weekend. That represents an additional 3.7 million in shares that are to be purchased and locked up in an attempt to be delta neutral should those calls go from being OTM to ITM as GGPI surpasses $15. My guess is that the open interest on the $15 calls is only going to increase, especially as we inch closer to the December expiry date.
Having a look at the strikes at $17.50 and above, there are 53,921 open calls for December and 39,794
open calls for January. These call open interests are each up 3,000-4,000 over the weekend. That's an additional 9.4 million in shares that get locked up in delta neutral call option positions by the option writers should these go in the money.
Keep in mind that this is a snapshot of the numbers TODAY. These numbers are only going to increase based on the high level of interest of call options already and increases in speculation and meme stock status. Below is a summary of a chart assessing the gamma squeeze potential, and we see the chances have improved from a few days ago.
On 11/19, mid-month short interest for 11/15 hadn't been reported yet. Now we know it has increased in the first two weeks by 700,000. The open interest of call options has increased across the board and represents a potential of 31 million shares locked up in delta neutral hedging strategies, an increase from 29.3 million.
Once the merger takes place, Polestar will have over 2 billion shares outstanding. This is a consideration for long term valuation (keeping in mind we already know it's way undervalued versus LCID and RIVN), but for near term squeeze potential, all we care about is the current number of GGPI shares outstanding. Out of 80 million shares, already 16.5 million of them are allocated for delta neutral in-the-money call option hedges for all expiries between December and 2024.
GGPI is a benefactor of having a very big story packed into a relatively small float into the SPAC. Current GGPI holders will be diluted by 20 times, as they should. Polestar is bringing A LOT to the table. Eventually that float is going to grow to 2 billion post-merger. However, GGPI is receiving a disproportionate amount of interest in call options RIGHT NOW because of this story.
What I'm trying to say is that in a normal IPO world, Polestar would have over 2 billion shares outstanding and the call option open interest that's generating 10's of millions of shares potentially locked in hedging strategies would not be a major factor to create a gamma squeeze. However, on a float of 80 million this IS a major factor.
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