A warrant is not an option, strictly speaking.
While what you say about options is generally true, a warrant differs in some important respects. The obvious ones are that:
1) It is a contract with the company whose stock it is,
not a "bet" with another speculator. If executed, the
proceeds belong to the company. And it conveys very specific
rights on the purchaser.
2) Only the company can issue new warrants. INTCW is a strictly
limited edition.
Now, you can use option valuation methodologies on warrants if you desire, but please try to factor in the differences, which in this case are the limited quantity and the large short position. There is one other wrinkle in this:
IF, and only if, a supply shortage should result in the warrant, i.e. so many are shorted that a legitimate buyer would cause a "short call" when acquiring his position, picture what happens! You buy the warrant from someone holding it long in his portfolio, however the position has been shorted by party 'Xyz'. 'Xyz', because of the shortage of available units, can't replace the position so has to cover by buying the warrants back, but there is a shortage and this purchase in turn bites another short, who has to cover, etc. But that's not all. Here's where the fun really starts:
The warrant trades independently of the stock, with its own supply and demand situation. The short has no rights in the contract between the warrant holder and the company. He can't replace the warrant with anything but another warrant, nor can he force execution by the party whose warrants he's borrowed. He can't even replace the warrant with stock (not that he'd want to), nor with money -- he can't force the owner to sell. All he's allowed to do is replace the warrants.
In other words, there is nothing to prevent a shortage in the warrants which could make the price rise far above its actual value. Once a certain percent of the warrants have been shorted, you reach a critical mass, which could create all kinds of havoc.
Here's another scenario: March '98 approaches, the premium has dropped to near nothing (from the 9% or so today), expiration looms. Well, it's time to execute your warrant, but your warrant was purchased from a short, who owes warrants to another owner. But the majority of the warrants have been shorted and everyone's in the same boat! Just picture the chaos and the shorts scrambling to cover. If the letter of the relevant agreement are enforced, there could be some very, very unhappy shorts, and some very high "11th Hour" premiums!
Not sure if this could happen, but it's interesting... |
