SPACs

SPACs are very popular these days and will probably continue being popular for at least another 12 month. Their destiny will be decided by success during that period.

What do you all think, permissible or not and under what conditions?

How do you arrive to reasonable valuation and how do you asses the opportunity for the company in 3-5 years?

Assalamualaikum.

Mersad

I thought that “game” ended in feb / March.

Where 100s of SPACS were going public. Looking for a deal. Before any deal, prices were going up 20-50% or more. Essentially paying premium for a cash shell.

Then a deal would be announced. They would go up more. Then deal would close. And they would go up some more. That game is over.

Looks like you are Long term minded

(1) check the history of SPACs as a whole and their performance post merger.

(2) check up on the amount of dilution possible

(3) understand incentives of the promoter who gets enriched doing the deal

(4) even if underlying is a good business ( rare) , you still need to value it and buy it for a reasonable price.

This is critical yet often overlooked. Personally, I believe SPACs can be great investment vehicles but more regulation is needed. Until then, expect to see a flood of random SPACs entering the markets backed by questionable sponsors/management with little to no track record.

Regarding the shariah permissibility of SPACs, you can read Mufti Faraz Adam’s opinion here. Tagging Shaykh @Joe and @umerkhan if they’d also like to weigh in.

You buy SPACs for the call option, it does not matter what SPAC is going to buy, it only matters that the deal will get done.

You buy as close to the IPO price as possible, you wait for a deal announcment, sell the shares and keep the warrant. Rinse and repeat. If everything goes well you have warrants for free or minimal cost. Easier said than done as we are buying in the aftermarket, but it can be done especially now that the market has cooled.

When the market was hot, retail thought they were buying the next AirBnb, while the pros where buying free warrants. As is typical, retail lost as the pros sold them their $10 stocks for $12 or $15 and keep the warrants for free.

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I think SEC is trying hard to keep up, certainly SPAC frenzy is not what it used to be only 4-5 month back because of some SEC moves. There is still, however, about 250 SPACs looking for target companies to take public in the next 12-18 months. And under pressure to get the deal done or give money back. That’s staggering. An opportunity for sure, but definitely requires care and studying.

Really helpful answers, thank you guys. JAK

Insightful, thank you.

I don’t think warrants are really available unless you are part of the PIPE though.

In case of new ipo of spac , for a while the unit made up of stock and warrant trades together. You can still buy warrant by itself after split.

it’s not guaranteed that on closing of a deal the price will rise from $10. There is no free lunch

Warrants are attached to the Units until they split. Depending on the SPAC you could have up to 3 securities trading, a Unit, a Share and a Warrant.

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Thanks for the tag Saad. While I have read Mufti Faraz’ paper, I do have a slightly different take on some of the positions given that I do not believe that the aaoifi standards are wholly applicable to spacs.
additionally because the majority of scholars do not permit options they would also have a problem with warrants. I personally have no problem with either warrants or options as well known, but I do think that the caution given here about the promoter is very warranted (no pun intended. ok I tiny one but anyway).
like any investment you need to have a strategy and understand your entry and exit. the promoter can many times simply be part of the hype surrounding a particular SPAC and in the end of the day they’ll make their money and you’ll be left holding the bag so be sure to do your homework.

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Salam Brother, do you have paper on stock options call/put when it is permissable? As in general what i have heard to not to do options, the only time I can think it can be permissable is when you own the stock, and buy PUT option to sell to avoid sharp decline or plunge that happend last year.

I found this article / video useful to explain

I don’t have a paper on it but did do a thread on Twitter. There is also a course I did where I go over all of the opinions on the topic as well as the pros and cons of each.
In short, I disagree with the link you posted and find his analysis to be lacking.

Jazakallah - is this the course -

As i was not able to find the twitter thread, and has been looking for guidance on this if it is Halal there is a considerable profit if done right all Muslims are leaving on table. I am assuming this course will cover the areas how we make money using options?

Yes that is correct, but I did not want to simply advertise my course.

just bought it :slight_smile: thanks, as something I want to get educated here.

I would also highlight that if AAOIFI and others have issues with options, they should have issues with ETFs as the market making for ETFs involves synthetic instruments including options. Food for thought.

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In Islam you can only sell what you own. An option is a contract where you agree to have the option to either buy something from someone and in return you give them compensation (options premium) or you sell the right (put premium) to something you own.

The issue becomes when people sell options to others, thus they are selling an option they purchased to someonelse, yet they do not actually own the option. This I believe is haram as you do not own the asset. Ownerhsip is the key test.

Also, you have naked options, where options are traded with no underlying security, which is clearly haram.

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