Betting on certainty in the era of uncertainty

Devising a winning strategy based on laws
Unlike the market which can be irrational for a very long time, laws are never irrational. They are well defined with tons of precedence cases for us to refer to. Thus, if we look for companies that is embroiled in lawsuits, we could analyze the chances of the company winning the lawsuit and determine if we can make a sensible investment strategy on it.

In July, there is one such opportunity that pops up. It is the biggest corporate lawsuit ever, with $44billion on the line. It is none other than Twitter v. Musk. A case where Twitter sued Elon Musk and is trying to force him to uphold his end of the bargain and buy Twitter at $54.20 a share.

The stage is set at the Delaware Court of Chancery. The fight will begin on 17 October 2022. The fans of both sides are excited and cheering for their sides. Get your popcorn ready for the fiercest and most epic battle ever in the Delaware court. Whooooooo will win this fightttttttttttttttttttt?

I’m betting on Twitter
If we were to analyze the case, the relevant law, and similar cases that happened before; We can have a rough sense of what is the chance of Twitter winning the case, and what remedies can Twitter possibility get that is within the power of the court. After researching, I believe that there is a very high chance that Twitter will win this case. However, I’m not a lawyer so what do I know right?

Thus, I tried looking for what other lawyers think of this case, and I only manage to find 2, and they are both leaning towards Twitter. One of them is the view of Guhan Subramanian ’98, a law professor from Harvard Law School. The other is the view of LegalEagle, a lawyer with 2.44 million subscribers on YouTube. I made post about their point of view and the link to the sources is at the end of the post.

After some research, I decided to “bet” that Twitter will win. However, there still lies the chance that something unexpected could happen such as Twitter losing, or Musk could walk away by paying the $1b fee, or if they tried to settle the case out of court.

Thus, I devised a “safer” strategy for my bet. Going all out and buy call options, will give me the highest return of 200%, but it also has the highest risk of losing everything if things don’t go according to plan. So, I sold deep out of the money cash secured PUT options instead. This gives me a maximum return of 8%, but even if Twitter were to lose the case, I could still earn money from it. How?

Trade strategy designed
This is because the strike price of the PUT option I sold is $25, with a premium of $2.03. Which means that I will “lose” money only if the share price of Twitter drops below $23 ($25 - $2.03). This means that if Twitter wins and Elon must buy it for $54.20 per share, I earned 8% or $203 per contract. If Elon manage to get Twitter to settle for $50, $42, or any price above $25, I earned 8% or $203 per contract.

However, in the worst case that Twitter lose the case, so long the share price does not drop below $23 (42.5%), I will still earn some money. Thus, to me this is the most sensible trading strategy that accounts for the small chance of mishap.

There are other strategies too and some of them are detailed in this post I made:

Conclusion
As you can see, there are opportunities in any environment. So long we have the right knowledge, we can grab hold of the opportunities. With the right knowledge, we can even alter the risk-reward structure of the opportunities.

Therefore, knowledge is very important. Don't just rush into investment based on emotion. Don't blindly follow what other people do. Even if you miss the opportunity now, there will be plenty of opportunities in the future too. So invest safe ah