The (missed) SBF Arbitrage Opportunity

Why Robinhood was a great trade when Sam Bankman-Fried went insolvent.

The (missed) SBF Arbitrage Opportunity
Sam Bankman-Fried dressed as robin hood... according to Dall-E, anyway.

FTX Dieded

A few days ago, I noticed $FTT, FTX Token, was dropping. It was November 8, and the steady ~$22 price had plummeted to $18 within an hour.

I don't follow crypto, at least beyond the price fluctuations of $BTC, but my friends explained that something something FTX exchange liquidity problems something something potential insolvency.

A few days later, it seems FTX will go bust.

So... how should one have traded this? Maybe the obvious answer was shorting $FTT, which fell to $2 over the last couple days.

And I would've shorted $FTT, but I don't trade crypto.

Sometimes I take bets on $BTC via proxy stocks like $COIN, $MARA, and $RIOT, but I didn't want to bet on a proxy of a proxy (i.e. shorting a stock which is a proxy for broad crypto prices, which is a proxy for $FTT's price). Too many leaps.

The unusual trade idea

Turns out a good trade would've been shorting robinhood ($HOOD).

Sam Bankman-Fried, the FTX founder, held 56 million shares in robinhood, and the rumours were he was insolvent.

That makes for a pretty easy trade... short robinhood via whatever means – shorting the stock directly, selling call spreads, or buying puts – and wait for his liquidation.

Of course, the liquidation may not happen. But that's what asymmetric risk is about. Shorting it with a very conservative stop loss if it doesn't happen, and a likely nice upside if it does happen.

And what do you know, $HOOD dropped almost 30% in two days. It's yet to be determined if that was SBF selling – there's been no SEC filings indicating it was – or maybe it was simply the fear of him selling. Regardless, it was a bigger move than ordinary stock market shenanigans in similar stocks.

The learnings

When a company is in a death spiral, or rumoured to be, take a look at what other holdings the company and owners may have and look for opportunity there.