PLCO/PLCOP. I've been mulling through my mind the whole arbitrage thing. I am not considering doing it, partly because I have never shorted a stock before but mostly because of the difficulties shorting BB stocks and some potentially dangerous (I think) scenarios. But I wanted to try to figure it out, as there may be some consequences for people long in PLCO and/or PLCOP. I currently have positions in both and plan, at least in the near term, to hang on to them. Please read my argument below and comment. I am not sure of all my facts here so be ruthless!
Let's look at how the arbitrage thing would work, at least theoretically. Let's just say, for simplicity, that the ratio of the PLCOP to PLCO is currently 1.5. So, if I sell short 15000 PLCO I can buy 10000 PLCOP. My cost on paper is zero. I simply wait for the ratio to increase and, when I am satisfied, cover my PLCO and sell my PLCOP for a nice profit. I could even wait until conversion and change my 10000 PLCOP for 60000 PLCO. Now I cover my short position and I have 45000 free shares of PLCO.
This sounds simple and, theoretically, risk free. However, there are a number of problems. First of all, there is the whole difficulty around shorting BB stocks. But suppose I can get a broker to do it. The first problem I see is what happens if the price of PLCO rises. Can I use my PLCOP as collateral, if the ratio remains the same or improves? If not I will have to keep putting cash in my account as the price of PLCO rises.
The next problem is being forced to cover because the owner has requested my “borrowed” shares because they want to sell. If the ratio happens is smaller than 1.5 at this point then I am out money. Israel mentioned “naked shorting” on the PLCO thread which relates to this I believe. If I can do it nakedly, then this isn't an issue.
There may be other difficulties as well and I would appreciate comments. However, as we approach the conversion date the PLCOP/PLCO price ratio must rise. It probably will never be 6:1 but it should get pretty close. When it does those doing this arbitrage will be very tempted to fold. Given the uncertainty, due to dilution after Dec 29, they will surely want to before this date. So we should see more and more covering as this date approaches. This will fuel the price of PLCO and it may go crazy, given what we expect from the company (website etc.) later this year. If PLCO starts to rocket at this point then think what will happen to the price of PLCOP.
Any and all comments on the above are most welcome.
Piper
|
