Bearish 3D-printer Play (DDD)

Midweek option activity indicated a bear on the prowl in 3D Systems Corp. (DDD) – one of the handful of 3D-printing companies featured in Barron’s last weekend. Others in the space mentioned include Stratasys (SSYS), ExOne (XONE) and Voxeljet (VJET). The magazine questioned whether investors’ fascination with such stocks completely missed the point that while 3D printing offers the potential to change the landscape of US manufacturing, such potential is not addressed by these companies. Investors, it suggests, are therefore overpaying for the privilege of owning those printing stocks.

Midweek our option market scanner picked up increased activity in a conversion trade – the creation of a ‘hedged’ long position, which acts just like an interest rate spread. The conversion play is not so much aimed at capturing a price move in the stock as it is geared towards the cost of carry. By Wednesday shares in 3D Systems had slumped 12% in response to the Barron’s article adding to a slide since February 21st through last weekend to 18.3%. The following chart shows how shares became increasingly costly to borrow during a short squeeze in the three weeks prior to that latest peak. The lack of available shares to borrow between short sellers forced up the cost of borrowing during that period to 33%, while prior to the squeeze holders routinely made their stock available at a cost frequently below 1.5%.

Chart – 3D Systems slid but its borrowing cost remained steady

The conversion trade involved the purchase of stock while simultaneously selling 2,000 calls and purchasing 2,000 put options both expiring 16 April ‘14 at the $60 strike – just around where its shares were trading at the time. The cost of borrowing shares in order to facilitate a short play according to IB data, has since fallen from its highs to a more palatable 5.5%. The terms of the recent conversion trade leaves the trader immune to the share price movement going forward, yet locks into a fixed borrowing cost. From what we can tell, the $0.90 premium implies a borrowing cost in the region of 7.5%.

A trader might do this because of the perception that borrowing costs will rise caused by either another short squeeze or greater willingness to short the stock among speculators. If this turns out to be the case the conversion trader would benefit regardless of the direction and assuming the trade can be unwound at the resultant higher borrowing structure. Perhaps most important of all to the potential short seller is the certainty that a conversion trade offers by locking into inventory that has previously proven hard-to-borrow. The investor could possibly await better prices or key record dates that might even make borrow inventory scarce just as demand is peaking.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

Visit: Interactive Brokers

Be the first to comment

Leave a Reply

Your email address will not be published.