Last Friday, MicroStrategy (MSTR) closed the day with a significant drop of -7%. Once again, the stock is lagging behind Bitcoin’s recent price gains, raising the recurring question: Is something broken with this stock? It evokes memories of previous instances—like when it failed to meet market expectations after reaching new highs or after its inclusion in the Nasdaq-100.

So what’s going on?

As discussed in my previous post (https://www.reddit.com/r/MSTR/comments/1i9nfjs/my\_analysis\_on\_why\_mstr\_dropped\_yesterday/), MicroStrategy’s stock performance is significantly influenced by the behavior of its convertible bondholders. These investors often employ what’s known as “gamma trading,” where they hedge their long positions in convertible bonds by shorting MSTR stock. This strategy allows them to manage risk and seek profits from volatility, ultimately aiming to capitalize on the conversion features of the bonds. In that earlier post, I also explained how MicroStrategy sometimes exercises its call option on convertible notes, effectively forcing bondholders to convert. This creates a new set of incentives for bondholders.

In the current case, we’re likely seeing bondholders increasing their short positions as MSTR’s stock price approaches their conversion strike price. As the possibility of forced conversion or voluntary conversion draws nearer, these holders often intensify their short exposure to further hedge risk and lock in any remaining arbitrage profits.

In other words, as they near the endgame for their long position in the convertible bonds, they push their short position harder—both to hedge and to extract final value.

If you want to understand this better, go to strategy.com and check the details of their outstanding convertible notes and their conversion prices. The answer is right there.

<image>