Kenyantykoon's Blog
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A real life warrant trade explained
Posted: July 23, 2010, 10:57 am by kt
I have done a few posts on warrants like warrants defined and how warrants work. I was reading through financial websites and I found a few press releases on companies offering warrants to investors. In the press releases, they use the terms used in the warrant markets to I figured that I should do a post walking through what they mean. This is because one of the major reasons for the existence of this website is to make investment lingo easy to understand and implement.
As I have said before, warrants give the holder the right to buy (call warrant) or sell(put warrant) a financial asset, that ranges from a stock to crude oil to third world currency, before or on a certain time(expiry sate) at a given price(strike price or exercise)
Knowing the above, let’s dig in.
In this linked market watch article, the US treasury says that it will sell warrants to buy the First Financial Bancorp common stock(this means that the warrants being issued are call warrants). The strike price that an investor is required to buy each warrant is $12.9. Now the price of this common stock(or also called the underlying) is $14.41 meaning that this particular call warrant is defined as in-the-money because the strike price is lower than the market price of the involved stock.
So an investor can buy the buy this $14.41 stock at $12.9 and either hold on to it and wait for a higher stock price and thus higher profits or sell it immediately making a pure profit of (14.41-12.9)=$1.51. The warrant investors can only exercise the warrant before the given expiry date after which the warrant becomes useless to him.
Another term commonly used in the warrant markets is “gearing“. This is dividing the price of the underlying(in this case 14.41) by the price of the warrant(in this case 12.9). The bigger this number, the bigger the chance for big profits (like in our call warrant case) or big losses (in the case of put warrants)
Also the conversion ratio for the above example if 1:1 meaning that you need one warrant to buy one common stock. Sometimes the ratio can be 12:1 meaning 12 warrants for 1 share or whatever the suits in the offices decide.
After reading the above, this ‘’The Independent” article one examples of issued warrants should be pretty straight forward.
Finally there is this press release of an ongoing warrant that you would like to read through so as to internalize the warrant concept. . It is also very straight forward and it seems these warrant holders are in a win-win situation. Truth be told, I wish I was a ProUroCare Medical warrant holder because the company seems to pass some of my criteria for me to invest in it; in my light analysis anyways.
I think that warrants are just a way of eating your cake and having it because technically you cannot lose more that you have put in. For instance in the first example, you cannot lose more than the $12.9 you put in even of the stock price goes from 14.41 to zero. While the said stockholders would get their faces ripped off, at least you as the warrant holder would suffer less loss is such a catastrophe happened.
Those are warrants for you. Even if I am not for derivatives as such, because of their complexity, I must say that I am warming up to these warrants.
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