What are Stock Warrants?
Financial Education Series
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Right now there is a lot of hoopla about warrants, particularly $FMCIW, $OPESW and others. Again these warrants are for SPACs which is the topic we covered the other day. Click on the word SPAC to read that article to be caught up. I will try to give the most simple explanation possible. A stock warrant is simply the to right to buy a stock at a certain price. Unlike a stock option, which is a contract between two investors, a stock warrant is between the investor and the company. You can trade (buy/sell) warrants or you can exercise the warrant which effectively allows you to buy the shares of the company at a specific price on a specific date. Stock warrants can last much longer than call options (some last up to 15 years).
Now, here's when it gets tricky. Why buy warrants vs. buying the stock?
Like options, warrants are basically a leveraged bet. You can buy more for less in the hopes gain more return on capital. But on the flip side, you can lose more.
For example:
"Let's look at another example to illustrate these points. Say that XYZ shares gain $0.30 from $1.50 and close at $1.80, generating a 20% gain. At the same time, the warrant gains $0.30, rising 60% from 0.50 to $0.80. In this example, the gearing factor is calculated by dividing the original share price by the original warrant price: $1.50 / $0.50 = 3, denoting the general amount of financial leverage the warrant offers. The higher the number, the larger the potential for capital gains or losses"
Source: Investopedia
Now let's look at $FMCIW, the strike price is $11.50 (price you can exercise into shares).
You can exercise after the merger or trade (buy/sell) before. There is a 5-year expiration, there is no theta (time decay), the downside is the warrants expire WORTHLESS if the merger fails.
In conclusion, the warrants provide the owner the right (but not the obligation like an option) to purchase one share of the underlying company at a specific price (typically the strike price is 11.50) per warrant owned. Warrants are far cheaper than the stock price which allows the gains to be much higher. ALSO, warrants can have some intrinsic value at purchase. The warrant price + the exercise price frequently is less than the share price, which would result in ARBITRAGE (difference in value) except for the fact that there is usually a "waiting period" before warrants can be exercised. $FMCI merger is being extended to anytime up to September.
Shares = safe if the merger fails
Warrants = lose all money if the merger doesn't pass, but possible 10 “bagger” scenario
In addition, I made a recent sell in my portfolio. I sold my shares in $WYNN resorts and I explain why in the video below. I apologize for the loud background music - I forgot to adjust the settings, will make better videos in the future!
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