Could IronNet (IRNT) have the potential to go up more than 300%?

None of the subs I’m active on will take a post on this one since the market cap is too low. I’ve got to share it with someone, so the 57 of you following me directly may or may not see this.

To start with, I am super skeptical of anything that mentions the word “squeeze.” Post-GME, it became a way to lure in suckers to be holding the dump after your pump. However, either this is going to be an honest to God gamma squeeze, or I’ve missed something big time.

Here’s the background. DFNS, a pretty good SPAC sponsor actually, acquired IronNet Cyber Security. However, 90% of the shares were redeemed last week. This brought the total float down to 1.2M shares. In addition, 1.5M shares from management were unlocked, giving us a total 2.7M shares available to trade.

Usually, options trading requires a much higher float than this. The CBOE requires a 7M share float (technically, 7M shares owned by holders without reporting requirements), and 2.4M shares traded in the last 12 months before allowing options trading. $IRNT is far below that, but before redemptions DFNS wasn’t. This has created a bit of a hole in the CBOE liquidity rulebook.

What does that mean for us? Well, there are a huge number of options being traded and a huge OI growing by the day. There are something like 40k total call options outstanding and more than 30k in September expiries alone, and there’s also been almost no retail interest either on Reddit or Twitter. I see a few reasons for that – market cap rules, the ticker change creates a delay in data for stock screeners to start finding it, and there have been plenty of other exciting meme trades over the last week. To me that means we’re looking at smart money accumulating options with the intention of driving a gamma squeeze. Once retail catches on, they’ll maintain the momentum and be left holding the bag.

Let’s do a deeper dive on what these calls represent relative to the float. I’ve looked at September calls only and pulled the latest OI from CBOE. That data is below.

Remember that puts have the exact opposite hedging behavior as calls, so I’ve netted them out and included their impact on gamma as well. Currently, 31% of the float is tied up hedging these long calls. On top of that, a $1 increase in the underlying price will drive net buying of ~11% of the float in order to maintain delta-neutrality. In addition, gamma will increase and the net hedging will accelerate as the $17.5 and $20 strikes get closer to in the money. This gives us a price around $17 where there aren’t enough shares to hedge the outstanding pool of call options and we get a gamma squeeze.

Conversely, this option pricing effect can be just as dramatic on the downside as the upside. If the price falls below $10, expect most of the 400k shares represented by the $12.5 strikes to add to selling pressure.

There is one major assumption we’re making here – that all these trades are unilateral with the market maker and the market maker is taking the short side of that trade. That’s almost certainly not true, but I believe it’s fair to assume the majority are.

In summary, I *think* we are watching one or more hedge funds set up for a dramatic spike in share price caused by market dynamics. Similarly, I think now is the time to invest alongside them to get a quick 4-5x return. I view this as extremely speculative, so I’ve only got ~$2k of exposure in $20 strike September calls, but I may increase that in the coming days.

I’ll end with a request. If you have information that disproves this thesis please share it. I have been looking for contradictory evidence, but have found very little.

Edit:

From their latest 8-K filed today. Post merger, there were 84,423,567 shares outstanding. 66,160,197 are subject to a lockup. 12,500,000 were PIPE shares that are not yet registered and not yet tradable, and 3.2M shares that are locked up except for charitable donations. The exact numbers are below.

The next shares that are expected to be tradable are the 1,078,125 incentive shares that are awarded to legacy shareholders if the stock price exceeds $13 for 10 consecutive days. The earliest that could be is September 9th. If this goes off, it will be before the 9th.

Edit #2:

I’m now fairly confident the incentive shares are subject to the lockup, so until registration of the PIPE shares, we’re looking at 2.5M float plus whatever has been gifted to charity. Warrants can’t convert for another 30 days, so those are also not a threat at the moment.

This article was written by /u/Undercover_in_SF