Exploring the Risks and Rewards of Short Selling Trump’s Soaring Stocks by Peter Burke | March 29, 2024
Exploring the Risks and Rewards of Short Selling Trump’s Soaring Stocks
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Trump Media & Technology Group (NASDAQ:DJT) stock has seen a significant increase of over 45% in the last five trading days. This follows a successful special purpose acquisition company (SPAC) merger with Digital World Acquisition (DWAC). There’s a caveat though, the company’s large valuation has drawn the attention of short sellers. It’s worth noting that as of September 30, DJT’s revenue was a mere $3.37 million, while its current market capitalization is around $7.5 billion.
Despite short sellers’ interest, they haven’t been particularly lucky due to the company’s popularity and novelty. It’s revealed that DJT holds the title for the most shorted SPAC in the U.S. This is based on its cost to borrow (CTB) fee of 157.57% as of March 26. To put it in perspective, the average CTB fee for a stock is just 0.6%.
At one point, “3.37 million shares worth $168.6 million were being shorted, equivalent to a short interest as a percentage of float of 11.69%.”
In the world of short selling, a short interest above 10% is generally viewed as high, while anything above 20% is deemed extremely high. DJT’s high CTB fee can be traced back to the limited availability of shares. This is because major lenders such as mutual funds or exchange-traded fund (ETF) providers don’t hold substantial stakes in the company.
It’s noted that “any SPAC with a significant amount of short selling will usually have high stock borrow costs and limited stock loan availability. In the case of DJTDWAC, there is extraordinarily little stock borrow available to support new short sales and stock borrow rates are extremely high.”
During March, short sellers of DJT and DWAC have faced substantial losses. Their mark-to-market losses total $93 million, representing a 73% loss. Looking at 2024, these short sellers are down by $158 million, which translates to a 152% loss.
There’s an expectation that current squeezed DJT short sellers will be replaced by new ones. However, the high CTB fee implies that DJT’s stock price will be more influenced by buyers and sellers of stock rather than short sellers. This creates a unique challenge for those intending to short the stock. The high fees combined with the limited availability of shares make it a costly and risky venture.
Poster Comment:
Betting against Trump is a bad idea.