RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Common vs Warrants..... I know a lot of investors and some of them have multi-million dollar portfolios. The vast majority of them have eyes that would gloss over whenever someone tried to explain options and warrants to them. I have come to realize that it is not intuitive for a lot of people to want to buy warrants because they lack understanding or they purceive them to be too risky.
in the case of TLT when Mackie evaluated the Offering at 0.30/share a value of 0.23 was assigned to the shares and 0.07 for the warrants presumably on the basis of a BS model. In the early days the warrants gained value and quickly started to trade above what might be called "fair value" based on the model.
Do while I was very interested in the warrants I was also weary as to how they would trade and how they would react to changes in the common shares. Currently the warrants have no intrinsic value because the common shares are below the 0.35 warrant exercise price - all the value is in the time premium.
What I have leaned from options trading is that there is fair value and market value so in the case of the warrants even though the warrants are trading above fair value the reality is that if you want to own them today you have to pay up. That is the best indicator that there are a lot of interested investors in the warrants and that their expectations are the common shares will rise well above the warrant exercise price within the life of the warrant - the next 4 1/2 years.
Because the warrants have such a long life they appear to be trading in a rough ratio of 2 warrants per 1 common share. Above 0.70 per share for the common I expect that to change to the warrants trading at the common share price minus 0.35 plus some time value for the option.
With options the time value declines as you get closer to expiry or when the intrinsic value becomes significant; in the case of the warrants when the common shares start trading well above the 0.35/share exercise price.Regardless I would not expect to see the warrants trade for a discount greater than 0.35/share because of arbatrage opportunities to buy and exercise the warrants versus buying the common outright.
i agree that liquidity of the warrants is far less than the common shares and that is always a concern with options trading. There are however over 60 million warrants outstanding and that is plenty to ensure a liquid market.
That said Liquidity could be a concern if I owned the warrants and wanted out when there is no intrinsic value. That is a risk if market sentiment changed for some reason or I just needed to cash out; there is no arbatriage when there is no intrinsic value in the warrants I.e. below a common price of 0.35/share.
The other risk with playing TLT just by utilizing the warrants is if there were some unexpected delay in getting regulatory approval before the warrants expire. That said the vast majority of investors believe the share price will be well above $0.70/share when the warrants expire.
As a previous poster commented, why not use both stock and warrants to invest in TLT? I totally agree and I have been periodically selling some shares to buy the warrants. I have reached my speculative & financial limits in investing in TLT so this is one way of acquiring more upside leverage at no additional cost.