Avis Budget Group (CAR), A Blue-Chip?

The float is a mirage and CAR is the proof.

Avis Budget Group closed at $713.97 today. It is trading in the $740s after hours. One month ago it was at $100.

Start with the float. The float is the number of shares in a company that are freely available for the public to buy and sell. 

Every scanner and every short squeeze tool uses this number to measure squeeze potential. 

Avis had a reported float of around 10 million shares. That already sounded thin. The real available supply was a fraction of that.

Here is why. 

Two funds controlled this stock in a way the float number could not capture. 

SRS Investment Management and Pentwater Capital Management owned 71% of Avis's outstanding shares outright. 

On top of that, both funds held cash-settled equity swaps. 

A swap is a private financial agreement that gives an investor the economic exposure of owning shares without actually buying those shares on the open market. 

The shares stay off the public market but the economic interest is accounted for. When Deutsche Bank added the swap exposure on top of the outright ownership, those two funds controlled 108% of the economic interest in Avis. 

More than the entire company. The public float was not 10 million shares. It was closer to nothing.

Pentwater triggered the squeeze by exercising a large block of in-the-money call options in late March. 

An in-the-money call option is a contract that gives the holder the right to buy shares at a price below the current market price, meaning it has real value right now. 

When Pentwater exercised those contracts, the market maker who sold them had to deliver actual shares. Market makers hedge their options exposure by holding shares in inventory. 

They had to find and deliver shares into a market where most of the supply had already been quietly absorbed through the swap structure. Short sellers, who had borrowed shares and sold them betting the stock would fall, suddenly could not find shares to buy back. 

A short squeeze happens when short sellers cannot exit their positions and are forced to buy at any price. That buying drives the price higher, which forces more covering, which drives the price higher again.

The days-to-cover ratio tells you how intense the pressure is. Take the shares currently sold short and divide by the average daily trading volume. 

The result is how many trading days it would take for all the short sellers to buy back at the current pace. Avis was sitting at 7.3 days to cover. Anything above five is considered extreme.

One thing kills this kind of squeeze every time. 

The company issues new shares. When Avis files an at-the-market offering, a program that allows the company to sell shares directly into the open market at current prices, fresh supply enters a market that was moving entirely on scarcity. 

Avis already filed authorization to sell up to five million new shares on March 27th. As of last week none had been sold. 

That authorization is sitting above this trade right now as the single biggest risk to the continuation of the move.

This is mechanical. The block trades in the options market told this story before the stock moved. The synthetic ownership structure showed up in the filings. 

The squeeze bars in Block Hunter flagged the condition. 

None of this required predicting where the stock was going. It required reading what the options market was already pricing in.

This is the type of analysis I do for my Block Hunter subscribers. I go over the Avis setup. How dealer hedging removes shares from circulation. How the float becomes a mirage. And the next name he sees building similar conditions right now.

If you want to learn more about Block Hunter, and gain access to my trade alerts, check this out. 

— Brandon Chapman