Inside Opendoor’s plan to give short sellers a temporary middle finger

At its core, Opendoor Technologies is a comeback story of an online real estate company left for dead.

And a miniature version of that story played out in earnest on Friday, when shares of the company were cratering after Opendoor posted a bigger-than-expected Q3 loss, with management guiding for even more red ink in Q4. The stock went on to erase a decline of more than 20% to finish flat — its largest daily comeback ever.

The stock is up nearly 15% as of 10:54 a.m. ET.

No doubt, the broader recovery in risk appetite is playing a role. But an Opendoor-specific answer probably lies in a tactic employed by management that’s pushing short sellers to think twice about continuing to bet against the company: a dividend of tradable warrants.

Shareholders of record as of 5 p.m. on November 18 will receive three tradable warrants for every 30 shares they own, each with exercise prices of $9, $13, and $17 that expire on November 20, 2026.

Here’s how this changes the proposition for short sellers in the short term:

• Before this move, shares of Opendoor were worth whatever you thought they were worth based on an analysis of future discounted cash flows (or vibes). Now, they’re worth whatever you thought they were, plus the option value embedded in these tradable warrants. So, more.

• From now through November 18, a short seller effectively has leveraged exposure to Opendoor: if the value of the stock goes up, the value of those looming tradable warrants is also going up (because they’ll be closer to their exercise prices).

• If you’re short Opendoor when this dividend of warrants is issued, you’re responsible for buying those warrants and delivering them to whomever loaned the shares to you, known as payment in lieu. (Or, your broker may charge your account the requisite amount and procure those warrants for their rightful holder.)

This can create a bit of a cascade: if some short sellers decide it’s no longer worth the extra headache betting against Opendoor under these circumstances and close their position, that’s buying power that can propel the shares higher, which could then dissuade other short sellers from holding their position, and so on.

“Yes, I’ll admit it, it gives me just a bit of joy that this will totally ruin the night of a few short sellers,” CEO Kaz Nejatian said during the conference call on Thursday. Of note: the exercise prices for these warrants also correspond to the performance-based vesting schedule for the new CEO’s pay package. That is, the interests of Kaz Nejatian and tradable warrant holders are nearly perfectly aligned (with some small timing discrepancies).

The three bullish contracts with the most volume on Friday expire at the end of this week with strike prices of $7, $7.50, and $6.50. Friday is the last expiry before the dividend of tradable warrants to shareholders of record. In other words, in the event these options are in the money, those exercising them would then (soon) become eligible to receive the tradable warrants, assuming they’d held those shares for a couple days.

As of mid-October, exchange data showed roughly 28% of Opendoor shares were sold short.

And tradable warrants aren’t the only thing Opendoor announced on Thursday that might put downward pressure on short interest: the company also revealed that the majority of its 2030 convertible notes were refinanced with equity. Holders of convertible notes often short the underlying stock as part of an arbitrage strategy (and now lose a reason to do so as the convertible debt disappears).

Later on the conference call, Nejatian added, “I don’t spend that much of my time thinking about short sellers. I never worked on Wall Street, and I generally don’t understand why these people do what they do. It just seems deeply boring and like just bad for the soul. I mostly just pity them. They don’t really build anything.”