The parabolic surge in Avis reached new heights, with shares halted for volatility

Pundits have a tendency to overcomplicate stock market movements when very simple explanations will do.

And in the case of the spike in Avis to all-time highs, we can keep it basic: there are more motivated buyers than motivated sellers — because previously motivated short sellers are getting their faces ripped off.

Shares are up nearly 350% this month through Monday’s close, which saw the stock power past its 2021 meme stock peak last week. The stock is building on those gains on Tuesday, already paused for limit-up volatility two minutes into the trading day.

One great explanation of some of mechanics underlying this short squeeze comes (unsurprisingly) from Bloomberg’s Matt Levine. TL;DR: the high concentration of Avis shares among two major owners might be making it difficult for short sellers to exit their positions.

He wrote:

“...economically, SRS and Pentwater between them own 106.21% of Avis’s stock outstanding. Huh! Actually the number is a bit higher: Pentwater also owns call options to buy another 775,800 shares (2.20%), for a total of 108.41%.”

“...if the two big Avis shareholders own 108% of the stock, in some loose probabilistic sense they own the shares you borrowed. If they converted their 108% partly-synthetic position into all stock, and stopped lending it out, you would have to buy back stock to return to them. Who would you buy it from? Well, they own 108% of the stock. You’d buy it from them. How much would you have to pay them? Well, whatever they wanted to charge.

This is not quite right — BlackRock will keep owning stock, etc. — but it is a bit alarming. The supply of stock to borrow is constrained and risky.”

Of course, this dynamic is belied by how Avis stock is doing in volumes. On Monday, more money changed hands trading the car rental company than Berkshire Hathaway, Walmart, or Bank of America.

If volumes are this high, this somewhat undermines the argument that short sellers face immense difficulties in getting out of their positions. Someone’s sourcing shares from somewhere, or else they wouldn’t be trading so much!

Since one way these two aforementioned firms have managed to boost their exposure to the stock is through total return swaps, this bears some resemblance to how David Hwang’s Archegos was able to accumulate ever-increasing positions in select tech firms. (Though we’d like to be clear that we’re not alleging any malfeasance here!)

But it’s also reminiscent of GameStop’s first meme stock moment. In the aftermath of GameStop’s 2021 squeeze and fall from grace, directly registering shares to ensure they they could not be loaned out to short sellers became the way for self-proclaimed “apes” to show they had “diamond hands” rather than “paper hands” — and provide a potential mechanism for another parabolic short squeeze in the future.

There’s a reason why “How to buy and DRS” is a community bookmark on the r/Superstonk subreddit, which is dedicated to discussions of GameStop.

On the other hand, Avis’ put/call ratio has averaged 1.6 through April as the stock has mooned, while GameStop’s was less than 1 in January through its all-time high.

Of course, just because options volumes are higher on the put side doesn’t necessarily mean that activity is bearish — especially because one way that Pentwater, one of Avis’ major holders, had structured its position is via put options that were sold to open. The expansion of open interest in options (to the extent that fresh positions are tilted bullishly, on net) can also contribute to demand for the underlying stock.

It’s tough to tell for sure, but the action in the most actively traded put option on Monday (with a strike price of $155 that expires in mid-June) did not appear to be an initiation of fresh bets against the stock, but rather an attempt to collect premium.