The VI for one year is used for the calc of the BS model. It is a historical momentum figure for the underlying instrument. This is the hardest figure for the buyer to come up with usually but is easily obtained by a spreadsheet and stockwatch dowloads of historical data. You can do eyeball estimates on charting and come out not too bad with a little figuring.
Interest rate and time to live/maturity are of course time elements. These elements alone indicates that there is a probability calc to establish value.
What you are calculating is the stat prob that the warrant will appreciate given a certain time, money decay, '$ distance' to appreciate of the stock, in the money amount, historical range and momentum. What I think is more important in the past year is the underlying stock's long term swings. If they are wide, then you have a fighting chance in appreciation past strike. That assumes you are right about direction, which is the betting aspect again.
Obviously low volatility stocks give you less chance, unless as in the case of UXG you are betting on the possibility that there will be a market change in direction for some reason, i.e. a merger, consolidation or court case outcome.
The BS model is close to what Ed Thorpe figured out for Las Vegas and the hedge fund industry and also what Shannon used to trade tech stocks in the 50's. Claude Shannon,the father of information theory. In effect you are trading in swings in the same way a modem is sending coded info thru a noisy channel. The passed info corresponds to a flat line that is the median thru the swings of the stock price, which correspond to noise. Shannon realized that to find a trading entry point you simply had to know the probability given a stock's price and its historical swings, what the direction and distance of a move would be in a certain time frame. This was written into the historical price performance for many social and economic reasons -- that you can ignore 90% of the time. What you are doing is guessing where you are in the average swing rate of the stock.. and how long on the average it will take to swing into a favourable position.
The same probabilistic predictive capability allows the communications engineer to predict that information will get thru a noisy channel at X speed if data is coded and compressed and some amount of redundant data/checksum is added to its transmission frame. The speed of data transmission is given by the degree and speed of compression as well as the individuality and 'syllabic variation' of the language and the data rate and the probability from these factors that a data bit will be received in good order. You cannot be too variable as compression may fail. This, strangely enuff, leads to the realization that weak signals transmit better than strong ones.. Variations on this probability-predictive theme allowed engineers to predict the location of the sunken US submarine the Thresher.
On the value of this warrant talk.. I thot it related to the warrants on silver wheaton versus BWR.. a valid topic for the thread.. Since single stock futures and options are now more part of the trading world, these kind of instruments will become increasingly important to the traders in semi-jr. metal exploration markets..
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