Warrants are the Rodney Dangerfield of investments in that they command little respect, and yet are extremely useful.
It's a little known fact that Canada has the world’s largest market for warrants, largely because of Canada’s large market for resource startups.
Warrants are usually attached to new issues as an incentive for potential
investors to commit. Hence the Exro warrants.
Warrants can be bought and sold any time up to expiry, just like stock. They are actually very simple. The word "Warrant" itself essentially means “ Bestows the right.”
The Exro warrant owners have the “right” to exercise their warrant any time up until February 3, 2025 at $2.00. ( the exercise price ). This means that by paying $2.00 for every warrant they own, and wish to exercise, they will receive 1 Exro share in their account, usually the next day, and regardless of what price Exro shares are trading at.
If you have a broker, you need only to inform him/her of your intention to exercise. He/she will take care of the rest. If you deal with discount brokers, the procedure will vary, but can usually be accomplished in minutes.
In almost all cases, it makes little sense to exercise a warrant before expiry. The underlying stock (Exro) may appreciate prior to expiry and you may decide to sell the warrant instead. If Exro is $6 in February 2025, for example, the warrant will be trading at $4.00, give or take pennies. ( $6.00 share price , minus the $2.00 you have to chip in to
exercise). If it's at $7, the warrant will be worth $5.00.
Selling the warrant will trigger a taxable capital gain.
If , however, you decide to exercise, any capital gain will be deferred until you eventually sell the stock. Your adjusted cost base on the stock for tax purposes will be $2.00, plus whatever you paid for the warrant.
The warrant will be worthless only if Exro is trading for less than $2.00 at expiry. They'll be worthless, because the stock would be available in the market for less than $1.85.
In most cases, there is no commission to exercise a warrant, although that may have changed since I left the business, but as far as I know, it hasn't.
Exro warrants are currently "out-of-the-money". This means that they have no intrinsic value. The intrinsic value is the stock price minus the exercise price
Most warrants trade for slightly more than their intrinsic value because the stock has plenty of time to go up before the warrant expires.
What you do with the warrant is entirely up to you. It’s yours. It doesn’t come with any obligation or commitment on your part.
Hypothetically, if Exro were to trade up to $2.66 in Frbruary 2025, the warrants in actuality would trade for their current price at $0.66, which is simply $2.66-$2.00 ( the exercise price).
With the warrant trading right now at $.66, and with the stock trading at $1.27, we can calculate the warrants annualized premium.
I'll simplify the calculation just a bit for you, but Exro would have to go to $2.66 on February3, 2025 for the warrants to expire at their current price.
It would have to appreciate 109% from its price today.
It would have to gain 109% in the next 398 days.
Very roughly, the warrants are trading at a 91.7% annualized premium.
By Canadian standards, they are very expensive.
This is an indication that the market is very bullish. Expectations are high.
If Exro goes to $5.30 you'll make 500% holding the warrants.
If it goes to $5.30, you'll make 317% holding the stock.
If Exro goes to $2.00, your warrants will expire worthless if you haven't sold them.
If it goes to $2.00, you'll have made 57.5% holding the stock.
The decision is yours.
'Hope this helps.