Below is our interview with Jack Raines, a trader who turned $6k into $397k trading SPAC warrants. Follow Jack on Twitter @Jack_Raines. Any text in bold is Alpha Letter, and all plain text is Jack. But first, a word from our sponsor.
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What’s your investing story?
I was a finance & Spanish major who played football in college, and I was always fascinated with stocks. In 2017 one of my buddies told me to buy Canopy Growth (CGC) because Canada was legalizing weed, and I threw in $2k.
I didn't know about valuations, cash flows, or anything else. I just knew weed was tight, and this company should kill it. It ran from $20 to $50 and I bought more, before it crashed to the teens. That was my only stock purchase for the next year and a half.
In Spring 2019, I bought a couple of ETFs that I held for 7 months, and I graduated from school in December 2019. Back home and looking for a job, I ended up on wallstreetbets during the first Tesla melt up.
I saw people making 6 figures gambling on call options, and I wanted in. I made a spreadsheet where I tracked my plays, and I made/lost a few hundred dollars at a time on Twitter calls, Apple calls. Lyft puts, Disney puts, Penn calls, etc. Then I got a job in Atlanta, GA and moved in February 2020.
Well COVID-19 hits, and wallstreetbets is saying YOLO SPY puts bc the beer-bat-flu, the boomer remover, the holocough, is gonna wreck the world economy. Naturally I YOLO June SPY puts, and they fucking print.
I would wake up at 3 AM to check futures, and I would go to the office bathroom at 9:28 to watch the S&P limit down at open. It was nuts. I was at $24k when Trump gave his COVID testing speech with CVS, Google, and Walmart's CEOs, and SPY ripped my face off. Lost $12k in 10 minutes. However, the Russians and Saudis flooded the oil market that weekend, and I sold my puts for $33k on Monday.
At this point, I'm rich in my mind. Naturally, I YOLO $33k of SPY puts two days later while it's at $230 ($415 right now for perspective, boy I was wrong). I literally shorted the bottom thanks to Powell's printer, and I lost $23k in 2 weeks.
I blamed the market, I blamed everyone but myself. The problem was, the market is just the market, and losing money was on me. 35% decline in one month, unlimited Fed support, and tech companies actually benefiting from COVID, and I was short. I literally felt sick.
Well I put $6k of my remaining $12k in a Roth IRA for some long holds, and I proceeded to gamble away the other $6k in Robinhood on oil tankers (RIP tanker gang smh), Zoom puts (ViDeO cOmPaNy Is OvErVaLuEd), etc.
However, my buddy texted me and said DraftKings was going public through something called a SPAC, Desert Eagle Acquisition Co. (DEAC). If you buy DEAC, you own DraftKings after the merger.
I bought a few calls and make like $300, but I noticed that DEACW, then DKNGW, was up 200% while the stock was up 45% in a week or two. I googled "SPACS", "warrants", "units", etc. to learn more.
I saw that Virgin Galactic was an OG SPAC, and I checked its price history. Sure enough, the warrants were up 1700% at one point. Once I read about the NAV floor that SPACs had, I knew I wanted in. I also realized that several warrants were still cheap and SPACs still at $10 from the COVID crash, and I could make a ton on their subsequent recoveries.
An EV/hydrogen semi-truck start up started appearing on my feed: Nikola Motors was going public through VTIQ. I didn't know much, but I figured it could meme so I bought $6k in warrants at $6.
They eventually ran to $17 at merger where I sold, before hitting $42 per warrant and $93 per share. Absolutely insane run, God bless Trevor Milton, that charlatan douchebag.
Nikola Motors literally got busted for pushing a truck down a hill, but I made some money on the way up. I realized warrants were a cheat code, and I helped co-found the r/SPACs subreddit.
I saw that FMCI was taking an unnamed plant-based food company public, and I loaded warrants at $1. That ended up being The Tattooed Chef.
I saw that SPAQ had good management and a deadline in August, and I front ran the deal. Made bank. I YOLO'd SOAC because warrants were $0.80 and they were targeting something green.
Sold at $1.60 on no news, just price appreciation. SBE and Chargepoint, STIC and Barkbox, ACTC and Proterra, CCIV and Lucid, I was probably in 35 different SPACs at some point.
Three times I had 30%+ pullbacks because I got greedy. I held SPAQ warrants all the way down from $7 (bought under $2) to $4.50. I sold SBE (ChargePoint) to YOLO GRAF warrants at merger, got wrecked. Finally, last March's pullback led to me buying the dip too soon. Still, I'm up a ton because I compounded so many wins.
When the SEAH news dropped, I realized this was my chance at "fuck you" money. An undervalued gambling play that the market was slow to react to. In investing, 1 or 2 concentrated bets can change your life forever, and I want that. I'm willing to push all my chips in on this one, over $300k on a dream. Maybe I'm right, maybe I'm wrong. Either way, I had the balls to play the game. I guess we'll see what happens.
Let’s take a step back for readers who aren’t familiar with SPACs. What is a SPAC?
SPACs are an alternative method for companies to go public (vs. IPO or Direct Listing). SPACs are publicly traded shell companies, or a bank account on the stock market, and they pretty much always price at $10 per share.
If a SPAC, DEAC for example, raises $400M, there are 40M shares at $10 each. SPACs go find private companies to take public. DEAC took DraftKings public, which is why I use it as an example.
SPACs offer private companies money for a certain percentage of the company. In the case of DEAC and DraftKings, DEAC gave DraftKings $400M for ~12% of the company, valuing DraftKings at more than $3.3B.
If you buy DEAC stock before the merger, you will own DraftKings stock afterwards. The only difference is the ticker will change from DEAC to DKNG, and there will be more shares outstanding.
However, SPACs give shareholders the right to redeem their shares for $10 + interest before the merger closes, since the SPAC shares are all backed by $10 in a bank account. This provides a "floor" at $10 for investors. If the stock dips below $10, there is risk-free arbitrage available. SPAC shares can climb to any level premerger as well. If you bought DEAC at $10 before any news of the DraftKings merger, you could have made a risk-free 50% when the stock jumped to $15 on the news.
SPACs also typically have warrants along with the stock. Warrants give you the right to buy the post-merger company at $11.50, and they have 5 year life spans. Warrants tend to trade for $0.75 to $1.50 before any merger news, but quickly climb afterwards. If DraftKings goes from $10 to $20 post merger, its warrants will jump from $1.50 or so to $8.50. Warrants provide higher multiple returns on good investments. The combination of defined downside risk with commons and levered upside potential with warrants can create interesting trade dynamics.
You've made your money in SPACs - How important are the fundamentals of the companies you invest in?
Fundamentals matter now. They didn't matter in 2020 (for SPACs anyway).
A year ago, any zero revenue EV, charging, Lidar, etc. SPAC would jump 50% on announcement, and the warrants would climb 150%. "Real" companies merging with SPACs barely moved.
However, market saturation (400 SPACs now vs. 50 or so last summer) and bad deals have led to a massive pullback where most investors are bearish on SPACs. Because of this many SPACs remain flat after merger news drops for a few days, giving us a chance to buy in cheap AFTER reading the investor presentations.
Fundamentals matter a ton now, in my opinion, and the new SPAC market dynamics give savvy retail investors a chance to review the company before throwing money in the trade.
A year ago you could throw cash at any SPAC the second you saw it, and you'd make money. Now you have to find the right opportunities, but they are still out there. SPACs, like any other sectors, will have winners and losers. Do your due diligence and you can find some gems in the field.
Why do you trade warrants rather than options?
Warrants are typically more liquid and have a five year lifespan, vs. options that have a maximum lifespan of ~1.5 years and varying liquidity. There are usually millions of outstanding warrants per SPAC. The longer timeframe helps you avoid losing to time decay.
Typical warrants have $11.50 strike prices, and the company can only redeem them early if the stock maintains $18 for a month This would imply the warrants trading at a minimum of $6.50 on redemption announcement.
Post-merger, even if a SPAC drops to $8-9, the warrants hold some value around $2 per warrant because their upside is still incredibly high if the stock starts performing well.
Given this dynamic, I realized that buying warrants in great SPACs below $2 is a great risk reward investment, though it definitely has some major volatility. Basically they provide the same upside as options, but you don't have to stress about the expiration date for years. Even riding warrants from $2 to $6 is a 200% gain.
Do you always go all-in on every pick?
Not always, but I often do. Quoting Buffett is cliché as hell, but he did say that diversification preserves wealth while concentration creates it. Most people 1) Can’t develop good original ideas to begin with 2) Don’t have the balls to bet big on their ideas 3) can’t cut losses if their thesis is wrong or stock moves against them. If you can do that, it just takes a couple of plays to change your life.
Money compounds quickly (both up and down), so I want to stack as many winners in a row as possible. I take a maximum of 3 positions at once, and that is only if my conviction is split pretty evenly. You have to bet big on conviction when it comes, because great opportunities are rare.
I don't think my fourth best idea will pay as well as my top 3, so why would I give it any money? Plus it's much easier to stay up to date on your investments if you have a smaller nest. I'm a big fan of being an inch wide and mile deep in my investments.
What's your current outlook for the market over the next year or two?
I'm not a huge fan of long-term outlooks as variables can change quickly. In March 2020 I thought we were screwed for a while, but the Fed saved the day. No one would have predicted COVID-19 in fall 2019. I'm not smart enough to make those predictions so I trade the market that I'm given, not the one that I want or expect. It's easier to sleep at night that way.
You've turned $6k into $300k - What's your endgame here? Will you keep doing this strategy, or is there a point where you'll stop and just put it into something passive?
As of this reply, it's actually $350k. Been a good week or two on the market.
My strategy thus far has actually been remarkably simple: I either buy cheap warrants and flip them as they ran up, or load up on SPACs near the net asset value (NAV) of $10 and sell run ups from there.
The upside on warrants is higher, but liquidity is a bit worse and if you get caught in a downturn it can hurt.
SPAC shares provide the $10 floor but typically less upside. If momentum is strong I'll ride the trade out, but I often flip the trades for 15 - 20% gains. When you have between 33% and 100% of your portfolio is a play, compounding several small-ish gains quickly works well.
I'm not fool proof though. When the SPAC downturn started in early March, I tried to buy warrants too quickly on the way down and lost about $100k in a month ($397k to $290k). I've since recovered, but that shows how easy it is to rush to buy something.
Patience and waiting for good setups is important, and I still need to work on that. Frankly the SPAC trade was incredibly easy last summer, but it's harder now that it's more mainstream. I like the challenge though.
I don't have an endgame per say. I have done all of my trading in a Roth IRA so I won't owe any taxes, but I do have to pay a fat penalty if I withdraw any pre-retirement. That being said, if I hit a million or something crazy like that, I would pay a penalty to withdraw between $50k and $100k.
I'm going to business school at Columbia University (NYC) in August 2022, and I would love to take a year to travel and see the world for a bit pre-grad school. I could leave 90% of the cash in the account and spend the rest doing whatever I want.
Investing is a means to an end for me. Obviously I want to make money, but more than that I want the freedom to have full control over my time and actions. Money isn't everything, but it does buy freedom. Getting that freedom while still in my 20s (I just turned 24) would be incredible. I guess my end goal is making enough money to do what I want, when I want, with who I want.
Is turning $6k into $350k repeatable for the average investor?
Absolutely, but it will be incredibly difficult. Anyone who tells you differently is either intentionally or unintentionally misleading you.
I have developed my own method, but there are countless ways to make money in this market. This is a psychological game, and you have to realize that if you lose money it's on you, it's not the market's fault.
When I first got started, I turned $10k into $33k by YOLOing SPY puts last March. Thought I was the next Jordan Belfort, so naturally I doubled down. Unemployment was skyrocketing, the world closed down, and everyone was doom and gloom. I ignored the fact that Amazon would crush it, along with other tech companies. I ignored the Federal Reserve's actions. I lost $23k in a week and a half, down 66%.
You're probably thinking "That was so obvious, why didn't you go long at the bottom?" Great question, why didn't you do the same?
Investing is hard as hell, and it will have you second guessing yourself a lot. However, money compounds quickly. Stringing a few winners together makes it easier to make money with time. A 10% gain on $10k is $1k, but a 10% gain on $100k is $10k.
It happens fast. If you want to play the game fast, you have to develop your own actionable ideas, be willing to put money behind them, and sell them quickly if you're wrong.
Most people struggle with "being wrong" and baghold until proven right. That's bullshit. Market conditions change so you will absolutely be wrong. Sell that shit and find something else. Capital preservation is key above all else; you have to stay alive to make money.
Can the average investor do it? Anyone can do it. You have to put in the work and conquer the psychological barriers that are a part of trading.
I do think it is very important to both make and lose a large percent pretty early, because you need to experience the euphoria of a win and the mind-numbing pain of a huge loss. You'll respect the market more, and realize that you're not infallible, but you'll also see what's possible if you string some wins together. You can't learn this from books, you have to experience it.
Which brokerage do you recommend beginner investors use?
Personally, I love TD Ameritrade. Customer service is great and the mobile app is easy enough. TD also has an extensive platform, Think or Swim, that allows for more complicated trades and provides more options for your charts and research. I would recommend anyone reading this to open a Roth IRA with their brokerage before anything else though. I do use Robinhood for my watchlist because it has the best user interface in the game.
What's your research process like?
I have two different processes for SPACs and other stocks.
SPACS: I've worked with a group of guys to build out an online community where we can quickly exchange information on what's happening in the field.
We have bots that scrape SEC filings for merger news, management changes, etc. and we have different channels for every SPAC. We have alerts set up where anyone in the group can notify the server when any new merger news is released.
SPACs can either have rumors (Bloomberg reports that $ABC is in talks with X company) or Definitive Agreements ($ABC is taking X company public at $4B valuation).
With a DA, typically the company releases an investor deck with revenue projections, market share, etc. If I find the company interesting, I'll skim the presentation to see if its plans are feasible and valuation is fair for the stock. Assuming those are good, I check the stock price and warrant price. If the stock is sub $11 and I like it, I'll often take a position as my max loss is 9%. If I like it and the warrants are cheap (sub $2 or so) then I'll start buying warrants in the premarket and size up if it dips at open.
I avoid 90% of SPACs and only engage in plays that I think will be winners. After that, I'll do a deeper dive on the company to make sure there aren't any major red flags that I missed on my initial review, and I'll check Twitter, Reddit, and Stocktwits to see if there's any chatter. I'll monitor social media content for my ticker regularly until I sell.
Other Stocks: I keep a large watchlist on Robinhood for a variety of companies. I don't believe in "growth" or "value". I think any stock can be a value play if you buy at a price that gives you a good chance of benefiting from future appreciation. Goldman Sachs and Ford can be "value" just as Fastly or Snowflake. Entry points are all that matter. Currently the market is selling off hard, and while my money is in my favorite SPAC (below) for now, I will reallocate if a better opportunity spawns from this sell off.
With the recent bear market in SPACs, are you still bullish on the space?
100%. In February SPACs were incredibly overvalued. The CCIV run to $60 was nuts. I was in at $11 and sold around $16 for a 45% gain, and some of my friends that barely invest were still all in at $60 because "it's the next Tesla, and it's going to $100+" even though they didn't realize that the implied market cap of the company was $60B or so at that point.
Pre-merger SPACs with no news were trading at $15, or 50% above their cash value. Deals with zero revenue speculative companies were pricing in the billions. This crash helped level the playing field.
We have had no new SPAC IPOs for 2 weeks, something that hadn't happened in a year. Investors are wary, and SPACs are now pushing for better valuations in their deals with private companies.
This crash helped ensure that SPACs will remain viable for a while, as the deals are becoming much more reasonable.
That being said, it's not easy anymore. It used to be "YOLO whatever SPAC you want" and make 50%+. Now, shitty mergers and SPACs underperform, but good ones do well.
DMYD's merger with Genius Sports is a fantastic play. Same with SBE and Chargepoint (though the valuation is still high for me). Obviously DraftKings was great. However, most of the EV plays will go bust. I am still 100% bullish, but you have to put in the work now. Most people can't or won't.
What else is on your radar besides SPACs?
While SPACs are my bread and butter, I'm constantly watching the broader market for opportunities. I write pretty frequently for Seeking Alpha to make some side cash, and my investment ideas appear there.
I look for stocks with great growth prospects that haven't been priced in. FinTwit loves crowded trades like Peloton, Fastly, Teladoc, Sea Limited, etc, but anyone buying Peloton at $160 was nuts.
Some of my better long-term ideas are Corsair Gaming (CRSR): 1.8 P/S, 70% revenue growth, 347% earnings growth, face of gaming peripherals, and stock price is still flat. Shift Technologies (SFT): Ecommerce used cars to profit off of the semiconductor shortage that is plaguing big auto right now. Callaway Golf (ELY): Merged with TopGolf, providing a great reopening play and natural business synergies. 1+1 = 3 formula.
I'm not predicting a crash, but we need a healthy pullback (S&P under 4000) to reset some of these valuations. the indices have been flirting with ATHs while most of the 2020 growth winners have gotten wrecked. A reset would help create a lot of great opportunities IMO.
I'm not saying to go cash or go short, but be prepared to make some plays, and don't rush anything. Personally I am staying fully invested in my main play (more on that below).
What advice would you give a beginning investor?
The stock market is the greatest game ever made, and the ultimate meritocracy. If you're good, you make money. If you suck, you lose.
Three books that helped me were "One Up on Wall Street" (Peter Lynch), "Trading in the Zone" (Mark Douglas), and "The Psychology of Money" (Morgan Housel).
These three books highlighted how 1) retail can gain an information edge on Wall Street, 2) to become a machine that trades the market, and overcome the fallacies that are part of our nature and 3) money causes all sorts of irrational decisions for humans, and we need to be wary of those.
However, if you want to make money you have to get in the game. Trading isn't some set system that you can perfect like math or science. You can't "learn" how to trade in a traditional sense.
The market is a collection of billions of human decisions intersecting at once, and it is as rational as its operators. You want to learn the game? Go play. It's difficult, you'll lose money, but if you can stick around long enough you just might figure something out. Your system won't be my system, and mine won't be yours.
My biggest advice is this: If you have to rely on someone else for conviction or ideas, you're fucked. Develop your own theses and put your money where your mouth is. The only way you'll figure this out is by jumping in the game.
What's your top pick right now?
First of all, this is not investment advice. This is merely my primary investment at the moment. That could change at any time. SEAH, and more specifically SEAH warrants (SEAH+, SEAHw, or SEAH/ws depending on your broker).
SEAH is taking Super Group, a gambling company, public. Super Group owns an online casino: Spin, and a sportsbook: Betway.
Betway is a recognized name worldwide as it sponsors several European football clubs. Super Group primarily operates in international markets (Europe, South America, Africa, etc.).
As a total online platform, the company benefited from COVID-19 while brick and mortar businesses struggled with declining attendance. Spin, the online casino, does over $1B in revenue and is profitable.
Free cash flow from Spin fuels the growth for Betway, thus giving Super Group its own in house cash cow. Super Group is going public through SEAH at a $4.6B valuation, incredibly cheap when compared to DraftKings, Genius Sports, Penn Gaming, Rush Street Interactive, and Golden Nugget.
Additionally, it's already posted a hundred million + EBITDA, while competitors are blowing hundreds of millions in losses while pushing growth at all costs. I think the market will rerate SEAH to match its sector valuations, and the warrants could take off when the stock moves. I'm betting accordingly. If something changes, I'll sell my warrants and move elsewhere.