I don't remember talking about safe returns, but rather about hedging. However here goes. Here's a chart of a stock that has a warrant.
stockcharts.com[w,a]dallnnay[dc][pb10!c5!i!f][iUl8!Ub6!Uf!Lc20!La5,10,7!Lh14,3!Lyb20,2.0]&pref=G
If you want to see the corresponding chart of the warrant, just change the ticker at the top left to RNG/wt.to.
But I am not concerned about market prices of the warrant, I am concerned only with what I describe as the delta-value of the warrant.
At the peak price of the common, $3.18, I "imagine" that the delta of the warrant is 35%, so the delta-value of my warrant holding is 35% of $3.18 times the qty of warrants held. This puts the total delta-value above the permitted percentage of PF value so I short some common here, to reduce the percentage below what is permitted. The overall position remains bullish.
Because the overall position remains bullish the delta-value of the position will continue to climb if the common continues up.
Equally clearly, when the stock price drops, the delta-value of the position will also drop to the extent that I will soon have to "buy" to restore percentage allotment. Accomplished by covering the short.
The point is to use the warrant delta-value. Its market price can be ignored because we don't intend to sell it. We are concerned only with PF values and maintaining appropriate allocations. |
