Don’t miss the impact of convertible hedging in AMC short interest, says IHS Markit
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Don’t miss the impact of convertible hedging in AMC short interest, says IHS Markit 02 February 2021US Reporter: Drew Nicol
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Like GameStop, the furore around US movie theatre chain AMC Entertainment Holdings’ short interest may be more than it seems, argues IHS Markit’s securities finance market analyst Sam Pierson.
While a contingent of directional equity short sellers likely remains in the trade, Pierson writes in a research note, a portion of the recent AMC short position is likely related to hedging the firm's outstanding convertible debt, which converted on 27 January.
“The impact of convertible hedging may have recently increased amid the surge higher in share price, which would help to explain the increase in share borrowing despite what would appear to be a face-melting short squeeze,” Pierson says.
The process of hedging a long position in a convertible bond, when the common share price is increasing, involves shorting an increasing number of shares as the delta of the embedded call option approaches one.
Pierson notes that, on the surface, this may appear like short sellers are ‘fighting the tape’ by shorting more shares as the price increases, but taking full account of the trade, the price of the convertible bond may be increasing by more than the delta-adjusted hedge, delivering a profit to the arbitrageur.
“While there is no evidence regarding short positioning specific to the holder of the AMC convertible note, the tightening of the borrow on 14 September, after a reset provision was triggered for the outstanding convertible bond, which increased the number of shares each bond was convertible into, suggests convertible hedging was a meaningful factor for short positioning in the shares,” Pierson explains.
Pierson also used the note to highlight that the real impact of short-covering contributing to GameStop's share price spike may be widely overstated amid fantastical descriptions of plucky amateur investors beating Wall Street at its own game.
Firstly, he says, there was a 5.6 million reduction in shares on loan tied to settling 13 January trading, which reflected some amount of short covering. But, the short position in share terms had only declined slightly in reaction to the single-day 57 per cent increase in the share price.
The short interest data for 15 January was published on 27 January and showed that the short interest only declined by 9.4 million shares as of mid-month, which Pierson says confirms that the majority of the short position remained in place as of 15 January.
IHS Markit data shows the number of shares on-loan declined by another 19 million shares between 22 January and 28 January, suggesting that a short covering increased in lockstep with the surging share price during that week.
Pierson explains: “It is worth pointing out that the total short interest (or shares on loan) were only a tiny fraction of the traded volume during this time, which does not preclude short covering from having had an impact at specific points in time, but, the buying of shares to cover shorts can only go so far in explaining the increased share price.”
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