One of the most important skills as a trader is knowing when a fundamental thesis is no longer valid—especially when you’re trading based on dilution. In this post, I’ll walk through how I identified that my original thesis on SRM had broken down, what clues I used, and how similar setups have played out in the past.
The Setup: SRM and a Crypto Treasury Announcement
SRM dropped news about launching a crypto treasury, similar to previous moves we’ve seen in KNW, SBET, and others. I was already familiar with SRM because I had taken a long position before the move—after a private placement on May 21 priced at $0.50 per share involving convertible preferred stock.
In this scenario, with the size of the gap, I assumed the investors involved would look to sell or short into strength, especially since they were sitting on a 10x move.
The Dilution Thesis
Here’s what I expected:
- The registration statement for the convertibles and warrants was still pending effectiveness.
- They couldn't legally sell, but could short the stock and cover later.
- So if they were going to exit, the selling pressure should be immediate and obvious.
This type of move usually fades quickly under VWAP. So I started shorting pre-market, expecting that early pressure would push the stock lower. Initially, that seemed to play out.
The Shift: When Price Action Invalidates the Thesis
But then something changed.
Around mid-morning, SRM broke back above VWAP and held. That was the moment I realized:
They’re not selling. They’re not shorting.
The thesis—based on the idea that cost-basis buyers would pressure the stock—was no longer valid. It didn’t line up with the price action. The stock simply couldn’t behave like this if that pressure was real.
I’ve covered this idea before in videos on MGOL, MLGO, and HOLO—where understanding what’s not happening (i.e., no selling) is sometimes more valuable than any filing (Check out previous videos on the topic: Forming & Abandoning a Dilution Thesis and Interpreting Agendas & Switching Bias (Parts 1 and 2).
Final Takeaway
A dilution thesis is only as good as the price action that supports it. When a stock holds strong despite a low cost basis for recent investors, something else may be at play. Sometimes, the absence of selling is the most bullish signal of all.
Key terms
- Private placement: a company sells new shares or other securities directly to a small group of investors, often at a discount to the market price, instead of through a public offering.
- Convertible preferred stock: preferred shares the holder can convert into common stock, usually at a set price. Each conversion adds new common shares to the market.
- Registration statement: a filing that registers securities with the SEC. Investors who bought in a private placement generally can't resell those shares on the open market until a registration statement covering them becomes effective.
- VWAP: volume-weighted average price, the average price a stock has traded at during the day, weighted by volume. Traders use it as a benchmark for whether buyers or sellers are in control.
Track dilution yourself
The SRM setup turned on a few facts: who bought in the private placement, at what price, and whether they could sell yet. Ask Edgar puts a ticker's outstanding warrants, convertible notes and convertible preferred stock, along with its shelf and ATM capacity and float, in one place. See the dilution data page, or look up a ticker in the Ask Edgar app.
For how companies sell stock into the market over time, read "What Is an At-the-Market (ATM) Offering? A Trader's Guide".
Watch the Full Breakdown
I walk through the full SRM trade, the setup, the shift in thinking, and more in this video:
https://youtu.be/MXFjSXCEBIQ