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Non-Tech : Auric Goldfinger's Short List
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To: Peter V who wrote (2197)6/15/1999 9:20:00 PM
From: Mama Bear   of 19428
 
Peter, as I understand the dynamic, the majority of the warrant holders bought them for leverage, rather than with the intention of exercising them to buy the stock. The warrant call demands that they redeem or be paid a nominal sum, such as .01 or .05 per warrant. Further, the warrant call strips all time premium from the issue. The premium being stripped they start trading at parity with the underlying. This also causes there to be no reason to buy the warrants for leverage. Now, we have an instrument that has no reason to be bought, but a lot of willing sellers. There has to be a reason to buy the warrants, so at this point they start trading at a slight discount. Now enter the arbs, who short sell the stock and buy the available warrants at the slight discount. The arbs will exercise the warrants to cover their short position, so no correspondent buys are made. Add to that the pressure added by opportunistic shorts, who have no desire to buy the warrants. Also smart buyers of the common will stand aside. Until all warrants that the seller either can't or won't exercise have been absorbed by the market can the selling pressure subside. Anyway, that's my crude understanding of why warrant calls cause selling pressure.

Barb
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