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Short a Stock that enters creditor protection


bizaro86
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I have a short position in Ivanhoe Energy, which recently entered creditor protection. The stock trades on both the TSX (IE) and NASDAQ (IVAN). The TSX has already halted, but Nasdaq hasn't. I think quite strongly that the stock is worthless, as there is a material amount of both secured and unsecured debt, and the assets are worth $0, even if oil prices improve. However, the stock is still holding on at ~$0.40. I'm happy to time arbitrage the situation and wait for the shares to be cancelled, but I'm not sure I understand the mechanics of how that works. If the stock is cancelled/doesn't trade, would I be able to/required to deliver the shares I borrowed?

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Well first of all your broker may not want to borrow for you shares that don't trade. You may want to check with them first if you can do it. Also I don't know how you want to structure the arbitrage. But if you use both IE and IVAN shares make sure that they are the same shares... ie, ISINs and CUSIPs match. Otherwise it shouldn't matter if they trade or not. You can short OTC stuff.

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If the stock no longer trades, eventually the shares will get cancelled.  In the meantime the position will suck up margin and you have to pay the borrow.

 

If you use IB, the share price gets rounded up to the nearest dollar (or something like that) and then you pay the borrow rate on that.  If the stock trades on pink sheets or whatever, you may need to call IB to execute your trade.

 

And then there are the short squeezes and forced buy-ins.  Not worth it in my opinion... but your mileage may vary.

 

2- Sometimes these bankruptcy things are worth something.  AAMRQ did incredibly well... 30-40x.

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Some time ago, I shorted a bunch of absurdly overpriced Canadian warrants that were way out of the money and set to expire in a few months. That was similar to shorting common stock in bankruptcy that will likely be extinguished.

 

When those warrants were within three weeks of expiration, I get a call from my Canadian broker telling me that I have to buy back the expiring warrants I had shorted.  That was disagreeable, although I made twenty or thirty percent on the trade, because I had mentally put my prospective 100% gains in the bank.

 

Has anyone had a similar experience?  Was there any way I could have avoided having to cover the short position in those expiring warrants?

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Thanks everyone!

 

If the stock no longer trades, eventually the shares will get cancelled.  In the meantime the position will suck up margin and you have to pay the borrow.

 

If you use IB, the share price gets rounded up to the nearest dollar (or something like that) and then you pay the borrow rate on that.  If the stock trades on pink sheets or whatever, you may need to call IB to execute your trade.

 

And then there are the short squeezes and forced buy-ins.  Not worth it in my opinion... but your mileage may vary.

 

2- Sometimes these bankruptcy things are worth something.  AAMRQ did incredibly well... 30-40x.

 

I do use IB, and the margin this position is using up is annoying, but not critical. I've had the position since well before they declared bankruptcy, as the overvaluation was pretty severe, even pre oil price drop. What I don't want to happen is end up paying for borrow on a worthless stock I can't cover for 2 years as a court case drags on. It seems likely that it should trade OTC somewhere after delisting from NASDAQ (March 3rd)?

 

Similar to TWA's situation, I kind of want to capture all the profits from what was a pretty good call if I can, but intellectually I want to make the right decision. 

 

It's funny you mention AAMRQ, I looked at that when it first went under, and bought the exchange traded bonds which eventually converted (they had a margin of safety and the stock didn't, imo). While the stock was a 30 bagger and the bonds were only a 8-10 bagger, the bonds didn't trade, which probably saved me from taking profits too soon.

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