Mark,
There are models that predict this sort of thing. The one I hear about most often is the Black and Sholes model. If you're interested in this thing, check it out. I don't know the ins and outs of this model, so I'll confine the rest of this message to basic mathematics. Today the stock closed at 18 3/4; the warrants at 8 3/4. So a rise to $24.00 would indicate an investment return of 28% for the stock. The warrants would return 37% in that same situation.
The price of the warrants is not capped at $12.00, of course. It is quite conceivable (actually quite likely) that during the 20 day period the stock could rise beyond $24.00. In this case the warrants would rise dollar for dollar with the stock. The table below shows the percentage gain differences at various price levels:
Price Stock % Gain Warrant % Gain
$24.00 28% 37%
$25.00 33% 49%
$26.00 39% 60%
You get the idea. When the stock price starts to approach $24.00, I'm sure the arbitrage will pick up between the warrants and the stock. I don't think anyone can predict how this will impact the short term movement of the stock, but I venture to say that trading will be volatile.
Now, owning the stock and the warrants aren't the same thing. If Microvision's price falls to $10 and stays there for the next few years. A stock holder will be out 47%, while a warrant holder will be out his or her entire investment. So, the warrants are an inherently riskier investment. They should be, since they offer a greater percent return. The point of the Black & Sholes model, I mentioned earlier, is to balance the risk against the return.
I am refraining from recommending either the stock or the warrants, since the decision depends on the risk profile of the individual in question. I just wanted to provide one possible framework for evaluating the difference between the two investments.
Stephan |
