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Is AMTD IDEA A Cheap Way Of Playing AMTD Digital?

Trade AMTD Idea Stock Your Capital Is At Risk
Updated 15 Sep 2022

Key points:

  • AMTD IDEA owns most of AMTD Digital
  • Therefore AMTD stock should track HKD
  • It doesn’t, not perfectly, so is this a useful arbitrage?

The meme stock excitement over AMTD Digital (NYSE: HKD) seems to be continuing with the stock up 11% premarket this morning. According to any rational or underlying analysis there is no reason for this. A newly floated IPO of some vaguely tech based HK financial stock simply isn’t worth $10 billion and change. Except, of course, people are buying and selling it at that price, $189 and now $225 this morning so, by definition, it is worth that much.

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What we might want to do about this is another thing of course. As Keynes pointed out, the market can stay irrational longer than you can stay solvent. So the immediate idea of shorting something clearly not worth the market price could be very painful. As evidenced by anyone who did that yesterday of course. It’s also possible to think of just trying to play the momentum but that runs into the problem of knowing what the momentum is going to be.

One other option is to simply not play. Or, perhaps, to play AMTD IDEA (NYSE: AMTD) which can be seen as a cheap way to gain exposure to the HKD price gyrations. For, as we’ve noted before, AMTD IDEA still owns 89% of AMTD Digital. Thus, logically, there should be some mirroring of movements in the two stock prices. Which isn’t quite the case, an anomaly that could be traded.

AMTDIDEA stock price
AMTD IDEA stock price from IG
AMTD Digital stock price
AMTD Digital stock price from IG

Also Read: What Happened To Meme Stocks?

In this analysis it doesn’t matter why HKD is moving as it is. Even that idea that everyone thinks they’re trading the Hong Kong Dollar doesn’t matter. For we’ve two prices that should be moving more or less in lockstep. Near 90% of the change in AMTD Digital stock should accrue to AMTD IDEA stock. There’s not much else of importance inside AMTD other than that holding of HKD after all. But as we can see those two stock prices are not moving in lockstep. There seems to be a delay in the price movement of the one in respect to the other. It’s thus possible to think of an arbitrage between the two stocks. If the price of the one moves, the other should, but there’s a delay, so buy the one and wait for the move.

The problems with this are that the two stocks are not actually deliverable against each other, therefore it’s not a pure arbitrage. That means that in a universe of only rational investors they would move in lockstep, the two prices. Precisely because people would do the arbitrage. But our whole interest in AMTD stocks, either of them, is that this here is irrational behaviour that we might want to trade off. And if they’re being irrational out there then how do we know that AMTD IDEA’s stock price will follow that of AMTD Digital?

This is one of those problems that isn’t really solvable. Any trade we place here is speculation on grossly inadequate information.