Re: MSTR-A Real Options Analysis.

Since I like viewing the world from an options lens, let’s reframe the GOAT/ 🐐 debate in terms of real options.

Some definitions first. In this debate, I differentiate REAL options from FINANCIAL options in this way: capital structure confers real optionality on a firm’s enterprise value, whereas financial options are the equity derivatives we all know and love.

The simple accounting identity A – L = E gives you an idea of the real optionality in a company’s capital structure.

Equity (E) is a REAL call option on a company’s Enterprise Value/Assets (A), struck at the par amount of Liabilities (L). E can’t be worth anything until L is made whole at par.

When a company issues debt, it is in fact selling a REAL put option on its assets with strike price = the par amount of total Liability L. If something causes A < L, E is worth zero and bond-holders (L) lose the amount L-A.

As a former convertible/capital structure arb, I can tell that history is replete with examples of corporate CEOs being afflicted with BYOBSS (Believing Your Own BS Syndrome) who issue gobs of convertible bonds when they really should be issuing equity.

Convertible bonds, especially when the coupons are near zero, represent a tantalizing Siren Song to these CEOs, because they think they’re “getting their cake and being able to eat it too.”

By selling equity at an OTM strike price (now I’m talking about selling an OTM FINANCIAL call) and paying less interest than in an equivalent duration straight bond, these CEOs are lulled into thinking that they’ve sold equity at prices higher than today.

After all, stock prices can only go up right?

Remember Tyco International and Dennis Kozlowski? He thought exactly the same thing when he sold billions of zero-coupon convertible bonds around 2000. Too bad he committed fraud which tanked his company and made A<L at a time when these debts came due.

Convertible bonds are BONDS and thus REAL SHORT PUTS embedded in the company’s cap structure unless the bonds get converted to equity.

So now we get to MSTR. Between his 2 convertible bonds, he has effectively embedded a $1.7B SHORT PUT position on his company’s enterprise value.

He then swapped all of his balance sheet cash (a ZERO volatility asset) for BTC (a 60- 160% volatility asset). Before all of these transactions, MSTR mkt cap was only ~$1.45B.

His first convertible is puttable in Dec’23. His second convertible is puttable in Feb’24. This could be horribly inconvenient for the Lord of Cyber Hornets if my thesis about an oil super spike coming around that time happens.

I explain my thesis on how the "commodity butterfly" can lead to risk-off in "hyper- beta assets" (like BTC) here:

At any rate, I have no dog in this hunt other than being fascinated by what I think is a real-time ticking time bomb. If BTC continues its ascent and MSTR convertibles wind up being converted to equity, Saylor will be GOAT.

If, on the other hand, some exogenous event (like the scenario I laid out) makes MSTR's A<L when his L comes due, you will witness a spectacular capital structure implosion. I hope he/his directors have great D&O insurance.

Some more analysis.

Apparently, Cyber Hornets can and do sting after all.

There are 2 "swords" that cut both ways that bear watching: 1) an artificially inelastic supply curve, 2) institutional adoption of BTC. In my own experience, I've witnessed as much if not more lemming behavior among institutions than retail.

When the sexy Siren Song that has driven demand in one direction thus far falters for whatever reason, even a small downward shift in demand against a near-vertical supply curve results in a massive drawdown.

How a Board of Directors could sanction issuing $1.7B of debt and swap a zero-vol asset for a 100%-vol asset is still somewhat flabbergasting to me. The good news: no near-term maturities. The bad news: who knows where BTC will be when his debt comes due.

HODLTilYouYodel!