David (drbh) Holtz
Aim at Alpha
Published in
10 min readFeb 12, 2021


Yes, the title is controversial, which is great! I hope this article either changes your mind, or you drop some words to chance mine!

The SPAC market as well as many other speculative investment have been growing at unprecedented rates.

Why I like them

Pile of money — You’re buying money

SPAC is an acronym for Special Purpose Acquisition Company. The name aptly describes what they do, they are companies that buy other companies. In reality they’re more of a fundraising effort rather than a company. SPACs are public companies that are classified as Blank Check Companies by the SEC and are very much just that; blank checks.

SPACs offer companies an alternative way to “go public”. Traditionally a private company that wants to go public would interact with a financial institution like a bank to create an IPO; initial public offering. The IPO process structures a deal that allow a company to issue shares and sell them to raise money. When IPO’ing a company will sell their shares to the underwriter, the underwriter will then sell those shares to the public.

The IPO process allows a company to raise money and based on the deal with the underwriters a company may be guaranteed to sell all of their shares.

However in order for the underwriter to go through all of the work/risk of buying and selling this companies shares, they need to believe that they’ll be profitable. Therefore IPO underwriters do extensive research into the business/industry and even secure capital before the IPO.

This process is comprehensive and arduous for both the company and underwriter. However it provides a trusted and relatively low risk way to raise capital.

Once the IPO is complete the company is publicly traded on a exchange. At this point the company has a ticker and is available for retail traders.

SPACs on the other hand are another way to raise capital but it’s a bit of a reverse process. Instead of the company being traded on an exchange after the IPO, the SPAC is traded on an exchange but is not an actual company; it’s just a blank check.

Essentially a person or group of people collect a large sum of money and go through the IPO process in order to be publicly traded. At this point the SPAC is nothing but a pile of money with management.

When a SPAC finishes the IPO process they generally begin trading at $10.

This $10 reflects a share of the money that the SPAC holds. You’re buying into a pile of money.

While it’s generally not advisable to pay $10 for a $10 share of someone else’s money, in this case you’re not just buying the money, you’re also buying into the management team of the pile.

These teams are trying extremely hard to make money. Not only do they want to make money, they have vested interest in making you money since your money in the same place. These management teams are great at making money and generally are made up of many very successful entrepreneurs and financiers.

Potential — Unknowingness

Aside from the financial wizardry, SPACs play to a very emotional side of the market. Since a SPAC’s intent is to buy another company the sheer potential has impossible to quantify value.

Humans are information seekers, we go out of our way to define the world around us with information. One thing that really bothers people is not knowing. Unknowingness has a lot of side effects. When we’re young the dark is scary, why? Because we don’t know, we can’t see what’s out there.

On the other side of unknowingness is potential. Another mystical force, the “could be” the “what if”. The unknowingness that leaves space of fear and mistrust of SPACs conversely also leaves space for imagination. It leaves space for non linear excitement and speculation.

They say buy the rumor and sell the news. SPACs are pure rumor creating material. Why not buy the rumors making material, wait for some rumors and see where you at then.

Companies have finite potential, they can’t make a trillion dollars next year — but an imaginary company can. Imaginations and rumors have no ceiling, therefore if you can buy into a SPAC really early and near their intrinsic value then raw potential works in your favor. Maybe you won’t even have to wait for them to merge to sell 😎

Influencers — People care about people

Next up, once you start to look at the world of SPACs in the 2020s you’ll immediately run into celebrities, oracles and influencers.

Since a SPACs future value is directly related to the management team, these individuals are very important. The decisions they choose will make or break the deal.

Sometimes these individuals get a lot of attention and embrace it. This shouldn’t seems strange in the modern world. Due to ubiquity of the internet and social networks we see more and more focus and idolization of individuals. It’s easier to be famous or gain a large following since communications become so fluid. This concept has become so commonplace we’ve even invented a new word; “influencer”.

SPAC managers are sometimes influencers too. This can play in it against your favor depending on the public’s response. However in the past year it’s becoming more and more apparent how much power and how quickly an influencers word will spread.

Attractive to companies — Avoiding IPO process

In terms of a way to raise money the SPAC is very attractive. It has the advantage of avoiding the traditional analysis done by an underwriter. A company only needs to convince a single SPAC management team.

SPACs are faster, some takes only a couple of months while IPOs can take years.

SPACs guarantee funds. Since the SPAC has already raised their funds via their IPO the company they acquire can receive the cash immediately and be sure the cash is readily available.

SPACs are much cheaper for the company.

Lastly SPACs allow the valuation to be determined by both the company and acquisition team which helps both parties agree on a price they find fair.

Attractive to fund raisers — Large payouts in short time frames

We haven’t got into the complexities of the deal but SPACs don’t only raise capital from their IPO, they often offer a PIPE which is Private Investment in Public Equities which allows private equity firms the ability to get in. In addition to the favorable deal for private equity the SPAC will sell warrants/units which are similar to options. Basically this smorgasbord of investment vehicles paired with the short time frame are attractive investments for larger investors.

The management team is also set to multiply their money if the deal completes successfully. This large payout is partly why SPACs are growing in popularity; they’re a great way for really wealthy investors to make a lot of money.

Attractive to retail investors — Opportunity to grow money like venture cap

Finally us normal people. SPACs offer the opportunity for retail trades to get into brand new companies. Buying into a company so early has the potential of large gains and growth a number of factors. Generally investments with this risk/reward profile are not available to the public.

Also as SPACs become more common, and have more success with larger and larger companies — it reenforces that this is a viable investment path. Over the past year we’ve seen incredible success stories around SPACs which make them more appealing to retail investors.

How to trade them

Super in the money calls — moving your max loss point up for more leverage

If you haven’t realized, it’s all about leverage. A SPAC alone is kinda leveraged since the risk profile generally offers much more upside potential than downside risk. This isn’t really something unique to SPACs but is a function of the age of a company and it’s potential to grow. There’s not much lower than the bottom, right?

However that’s not enough leverage for us! We want to lever each dollar. Luckily we have a well known way to do just that; the “Call Option”.

A call option allows us to buy control over shares in increments of 100. Calls are a contract that’s sold at a much lower price than the actual stock. The risk you run is if the stocks price closes below the calls strike price at expiration; your calls are worthless.

However we know that every SPAC share is intrinsically worth $10 because it is a share of a pile of money, so we can move our strike price up towards the $10 without increasing our risk linearly. While it may not be a hard bottom of $10, we can be more confident that the shares will not drop below $10 in the near future; due to the fact there’s actually cash behind the SPAC.

The higher a strike price the lower the cost is per contract. We can use this relationship to leverage our dollars.

Basically by moving the strike price up towards $10, we can spend less money avoiding risk, and use those dollars to buy more contracts. This should result in a very steep profit/loss slope compared to buying the shares outright.

Let’s look at some examples numbers to make it concrete.

Let’s say a new SPAC just IPO’d and is trading at exactly $10.

Let’s say we have $5,000 to invest and we want to maximize our potential profit.

Let’s also say that Calls with a $10 strike that expire in 180 days is trading at $1 (which applies to 100 shares so actually cost $100).

We can either buy the shares our right using our cash, or we can buy the calls.

$5000 / $10 a share = 500 shares

$5000 / ( $1 per contract * 100 shares ) = 50 contracts = 5000 shares

Above we can see how using the same amount of money we can buy control over 10 times more shares. The leverage also comes at a cost, we now need the price to stay above $10 to not lose our total investment, and we need it to be above $11 (our breakeven) in order to make any money.

However, based on our assumptions that we will not go lower than $10 and that we’ll have speculation/news push the price up we are confident we’ll be above the $11 mark by the time our contracts expire.

Let’s look at the profit and loss chart comparing the two investments.

Above we can see the blue shares line, and the much steeper green call line. As the price increases on, we can see how much faster the calls P/L grows compared to buying shares.

Looking at the $15 mark, we can see that buying shares would result in a $2,500 gain, where buying calls would be $20,000 at $15.

Using this method we can leverage our money in multiple ways. We get the contract leverage along with the already speculative SPAC. Which seems incredibly risky at first — but when reviewing the structure of the deal and the pile of cash we see that we can actually lower our risk.

By no means is this a safe investment, but it’s a way to play this already speculative investment. Don’t invest in a SPAC unless you’re willing to lose your total investment. However if you are willing — why not maximize your returns?

Okay I’d be lying if that was the only way to maximize your potential return, there are more complex strategies that will actually return more money with the same price movement we used in the example above.

Let’s look at a 3 contract ratio strategy called the Long Call Butterfly (at least thats what I call it)

Long call butterfly — for those really aggressive traders

So buying in the money calls isn’t enough. Yea you can buy some out of the money calls and really take some risk — but let’s look at something that has a similar risk profile as above — but we leverage our money more.

The main idea here is that we’ll trade off some potential large swing upside for a steeper slope at prices much closer to the current price.

Basically we might be assuming that the price will rise above $10 but we may be less confident that the price will move past $20 in the short term. In addition to knowing that huge price moves are unlikely — we also know that we have to go $10–$19 before we get to $20, so if we are attentively watching our trades we can exit before our trade off work against us.

Using this logic we’ll construct a trade that maximizes profit at $15. We do this by buying those $10 calls but instead of only buying calls we also sell calls to help fund buying more $10 calls. Last we’ll buy a $20 call to protect us from the downside of the calls we sold.

Let’s make it concrete with some prices and a profit and loss chat.

First we want to use our $5000 to buy as many calls as possible.

Lets say we have calls priced

$10 strike at $1

$15 strike at $0.5

$20 strike at $0.25

Using those prices we can construct a triangle that cost about $5000 for 200 contracts. Remember above we paid $5000 for 50 contracts, so here we’re getting the opportunity to buy 4 times more contracts for the same amount of money, but limit our far out upside potential.

By increasing our contracts by so much we’ve also increased out max potential gain by a massive amount. We can 19X our initial $5000 if the contract expires and the price is $15. That means we have the potential of $95,000 profit compared to the $2500 from buying shares if the price moves from $10 to $15 📈

It’s pretty crazy how much we can leverage out dollars if we’re willing to take the risk and know how to construct orders that give us leveraged returns for realistic SPAC price movements.

Of course the examples above assume you have the opportunity to buy a SPAC at a price very close to intrinsic value and that your trades all get filled when you want them too. Real world trading is much more dynamic and will not always allow you to construct trades you find worthwhile.

Also none of this investment advice! This article is solely my opinion on SPACs and more specifically option trading on SPACs. SPACs are known as risky investments. Options are also very risky and should not be attempted by uninformed individuals.

However I do hope you found this article informative and sparked you to think about SPACs and Options in new ways!

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.