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Weighing Risk versus Reward

Wrap Technologies, Inc. (NASDAQ: WRTC) sells security products for professionals.  The Las Vegas-based company has a $180M market capitalization.  100-day volatility has been consistently above 70 during the past 6 months.  The share price had a wild ride from a $4-handle in December 2019, to above $7 this month and came back into the 6s.  Starting in December 2019, the borrow fee increased from the 20s to >200%.  Investors which contemplate shorting can experience stick shock when they see triple-digit borrow fees on IBKR’s real-time display.  A question we encounter is “why would someone pay that much interest?”  WRTC is a good example of one possible reason: speculation.

On February 21, WRTC closed at $7.59 per share and the borrow fee was 86%.  On February 25, WRTC closed at $5.95.  That is a 21% decline in 2 trading days.  If we annualize the capital gain for an apples-to-apples comparison to the borrow fee, it is north of 1,000%.  The average annualized borrow fee for those dates was 90%.  Of course, the scenario could have played out differently. 

We are seeing small locates from retail broker counterparties.  The borrow fee is 95% with Utilization the same.  Short Interest is 15% of the float.  This suggests that the largest holders, which are individuals according to SEC filings, may not be making their shares available to lend.

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Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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