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Conspiracy Theory

  1. 1,608 Posts.
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    This may be a bit of a yarn, but it is worth thinking about....
    In January 2018 Toyota bought ~$280mm of ORE at $7.50. That is 37.6mm shares at a (then) premium of apx 17%. As of Jan 15 2018 ORE sp was $7.14, GXY sp was $4.30.
    It would follow that a conservative company like Toyota in a conservative country like Japan would seek some protection against such a large position. One of the most straightforward options would be to buy "At The Money" (ie current market) Put Options (for 2 years to cover the stand still period). These are usually priced with a "Black & Scholes" model (available on the internet) to simplify things a little bit, accept my word that the hedge on selling Toyota the PUT option is 50% of the underlying amount of the stock. eg if Toyota bought 1 million PUT options with a strike price of $7, the Investment bank that sold them the options can either try to trade out of them at (hopefully) a better price, hedge them, or a combination of the two. Whichever one they do, someone still needs to sell 500,000 shares in Orocobre as (the most accurate) a hedge. This is where it gets a bit more sinister (I hope you are following me so far).
    Given liquidity constraints in the real world, an investment bank will look for the best approximate hedge in this situation. That would involve shorting the most highly correlated instruments that you can to protect yourself against movements in the underlying stock. ie you would also sell GXY as well as ORE and maybe a few Albermarle as well. Plus, and this is the kicker, the lower the stock goes, the higher the probability of the PUT option being excercised. Therefore, the bigger your short position needs to be. ie It can become a self fulfilling prophecy.
    When Toyota took the placement, and MAYBE hedged it with PUT options, both GXY and ORE were at all time highs. Since then, they have done nothing but rellentlessly head for the bottom right hand corner. This is all speculation of course, and wouldnt/couldnt tell the whole story of price fluctuations in the sector. BUT, if there is any hint of truth in this theory, trading in these stocks could get very disorderly indeed leading up to the expiry of the standstill period expiry (and the maturity of the option position).
    Just speculation folks NOT ADVICE. Probably no truth in it anyway.

    Last edited by Quiono: 16/10/19
 
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