Current INTCW conversion price is $40.25,increase to $41.75 on 3/15/97
The warrants eventually expire on 3/14/98.
The warrants will split when INTC splits. There are several reasons for individual investors to buy INTCW instead of INTC:
1. If you are very bullish on Intel between now and March 98, and you want to control the price action on a larger number of Intel shares.
2. If you use margin to further leverage your position, you can use warrants to borrow against (unlike LEAPS or options). For example with the stock at 135 and the warrant at 96, you could control the price action in one share of stock for only $48 (plus commissions and margin interest paid).
3. If you want to play a possible "short squeeze" near the warrant expiration date. Since these warrants were issued by Intel, there is no provision to deliver shares on exercise by anyone other than Intel. This is unlike options. There someone who is short a call option, can wait until the expiration and deliver stock to the option holder instead of buying the option back. With these warrants, the short seller must buy them back and return the borrowed warrants to the actual owner. I doubt that this "short squeeze" aspect will add much to the warrant values at that time. Most short sellers are aware of this and will cover before then.
There are several things to keep in mind:
1. Using the current conversion price of $40.25, the warrants should never sell for more than 40.25 less than the Intel share price. After March 15, 1997 the warrants should not sell for less than 41.75 less than the share price. If this was to happen, arbitageurs will jump in and buy the warrants and sell the stock.
2. Usually the warrants will sell a slight premium to conversion value (stock - warrant conversion price). This premium is due to value of about $40 now versus $41.75 paid in March 1998. It could also include some risk premium for holding more risky investment, but since the warrants are so far "in the money", this risk premium is minimal. Actually, since the premium has only been about $1.00 lately, the implicit borrowing cost of $40 plus the increase to $41.75 is only about 4% per year!!! Oh, plus 20 cents per share that Intel pays in dividends that you would forego if you purchase the shares. Make that 4.2% per year!!
Clearly for most small investors, you should buy the warrants instead of the shares. Even if you don't want to leverage the investment, put the $40 you save in a higher yielding fund.
As for taxes, if you exercise the warrants in March 1998, you won't pay any taxes until you sell the shares. You just add the exercise premium paid to Intel to your original cost basis.
I own a large number of these warrants in both taxable and non-taxable accounts. I plan to exercise the taxable warrants, if I am still bullish on Intel then. |
