Re: MSTR-Painting Targets & The Negative Gamma Cascade.

There’s perhaps no bigger poster-child for crypto-hubris than the Lord of Cyber Hornets.

Quoth he his AM:

Except as a steward of publicly traded company along with a board of directors charged with the same fiduciary duties to shareholders/creditors, the decision to HODL a 100%+ vol asset might be wrested out of his hands at the most inopportune moment.

I have written at length about how his decision to issue 2 convertible bonds to HODL BTC have created extremely destabilizing influences in the MSTR capital structure:

What I haven’t yet done is discuss how this dynamic can create a cascade of “negative gamma-like” effects between MSTR and BTC. I will do so now.

First, let’s zoom out and examine the gamma profile of a typical convertible bond. This is a chart from a presentation I gave back in 2010:

Couple key take-aways: 1) The area around the conversion/strike price is positively convex (you are long a “call” on equity, BUT 2) The area that I label “Distressed” is not only negatively convex, it is MUCH more negatively convex (delta gets steeper as credit implodes).

Moreover, the “strike” around which this negative convexity materializes is a moving target and shifts with sentiment/perception. The scariest thing about this part of the curve is when perception -> reality.

How does perception become reality? Let’s say the CEO does something reckless (like maybe swapping ALL available Tsy cash for BTC?) and some exogenous event causes BTC to crash (like maybe inflation of real opex/capex commodities?).

BTC implosion -> MSTR implosion -> Converts go way OTM with respect to conversion strikes and leave positive gamma region -> if implosion continues and enters that “Distressed”/negative-gamma zone, SELLING BEGETS MORE SELLING in MSTR.

You know what’s even worse? OUTRIGHT convertible funds now dominate the market, NOT arbs. Outright holders can’t hedge, so they have to just dump bonds. Bonds, especially distressed bonds, are highly illiquid and tend to GAP down.

How does this feedback into BTC? As I mentioned in another thread, there is a “Zone of Insolvency” doctrine applied to fiduciary duties of corporate officers and directors – when a company enters distress, it must not just consider EQUITY interests but also CREDITOR interests.

In this case, creditor interests would demand that the board liquidate his BTC holdings to bolster his credit rating. Saylor may want to HODL, but circumstances might force his hand to puke his BTC at an inopportune time.

Worse, his hubris to crow about how many coins he owns and at what price all but tells you his points of vulnerability, i.e. he has painted a bright red crosshair on his back.

Remember that convertible chart earlier? Now stack one on top of another, because he issued TWO convertible bonds, one struck at $397.99 and one struck at $1432.46. Note that MSTR is now trading at $435 – down 67% from YTD high of $1315.

The first convert is barely ITM, but the second convert is completely “busted” (technical arb lingo for WAY OTM and likely in the Distressed zone).

If the “selling-begets-selling” dynamic takes hold due to the negative gamma of the OTM convert, it can easily cascade and push even the first and now ATM convert into the Distressed Zone.

If this happens, his board in an effort of self-preservation, may shit the bed and force Saylor to liquidate his precious BTC. Note that this will be happening at BTC prices likely to be MUCH lower than even here. Talk about the tail wagging the dog.

This is a chart that shows BTC/MSTR relative performance since the issuance of his first convert.

Your guess is as good as mine as to what happens ultimately. Like I said in my interview on @RealVision yesterday, the “good news” for him is that his maturities are still a couple years away.

The “bad news,” however, is that 1) he has painted himself into a rhetorical corner by saying he will never sell, and 2) circumstances out of his control may force him to do otherwise. I hope he/his directors have great D&O coverage.

Someone asked for yesterday’s interview link on @RealVision. Here it is:

Re: MSTR-Postmortem Convert Analysis. High-strike bonds settled around 71.5c vs $454.86 stock, 6%’s up 127% which means 6% yield-to-put, 127% premium over parity. FUGLY.

Mind you, that “yield” is if you assume it pulls to par. But because it is a zero coupon bond, it has ZERO current yield even at 70c. There is $1.05B outstanding...”backed” by BTC.

The pre-Cyber Hornet marker cap was around $1.45B. If, for whatever reason, MSTR trades below the lowest conversion price ($398) at debt maturity, he owes $1.7B of DEBT denominated in USD, not BTC.

For shits and giggles, I wanted to see what $ price “yields” 10% — it’s 57c. 43c “yields” 15%. You see why that negatively convex region tends to see gap risk?

Like I said, he has ample time to maturity. But as the last couple days have shown, random exogenous FUD can crater this asset 40-50% in a matter of days. If this happened close to maturity those bonds would be in their 20’s.

Re: MSTR-Massively Short BTC Vol. So if you think of a "busted" (way OTM) convertible as debt which has a "short put" gamma profile (far-left zone of my convertible chart), this here is the problem. You are SHORT this asset volatility:

Take the poll:

Hearing new MSTR convertible price talk is in the 6.25-6.5% range, a far cry from 0%

last time. While that’s a solid “junk” yield these days, it still seems way too low to insure against further Cyber Hornet stings.

One more thing about MSTR's new convert. He's PRIMING (aka fucking) the existing $1.7B converts by making these SECURED. Consequently, old converts have NOT held up well and now trade in the 60's.

What does that tell you about mgt incentives? As I stated in a different thread, he is solely focused on maximizing his equity "call" while forgetting about his creditors who are short the "put."

The new bond priced at 6.25%. It is NOT a convert apparently (despite reading various reports that it was). It is a senior secured STRAIGHT bond at 6.25%. Incredible.

Not only is this bond secured by BTC, it is STRUCTURALLY senior at the Opco (vs converts being unsecured HoldCo). Translation: existing convert holders got double fucked.