Wirecard CDS Longs: A Lesson In Crushing It

Last week, when we said that a WireCard bankruptcy was imminent after the full extent of its corporate fraud – and missing billions – was finally revealed, we observed that while stock shorts were finally taking a well-deserved and long-overdue victory lap with the stock now worthless after the company indeed filed for insolvency today…

… that the real winners here were not the stock shorts, who by definition are capped to a maximum upside of 100%, but the CDS longs (synthetic bond longs), whose only limitation was the initially available margin capital (the theta, or coupon, is tiny by comparison). As a reminder, last Friday the CDS was trading at 73 points up, virtually assuring that a default was imminent.

Fast forward to today when as shown in the chart below, WDI CDS has jumped another 10 points higher, and has now exploded from 15 points upfront just three weeks ago, to over 80, which makes sense with Wirecard bonds now trading at 17 cents on the dollar.

What happens next, besides the incarceration of several Wirecard execs as the company – until recently the most popular one among Europe’s retail traders – slides in bankruptcy?

Well, last week we wondered if we about to witness the second coming of CDS, whose very use by its reflexive definition, forces markets to reasses the fair value of credits… and will the ECB (or Fed) be forced to go company by company and bail them out by purchasing their bonds out of bankruptcy?

Alternatively, perhaps it is time for Robinhood to allow its Gen Z trading army to sell CDS now too, just so they can lever up even more on their insane stock bets, leading to a tidal wave of suicides the moment the market suffers even as modest correction.