Wow, this is turning into a full time job. Opportunities for arbitrage open up when there are two trading vehicles for essentially the same good. When the trading vehicles reflect sufficiently different prices for the good, it invites people to sell the higher one and buy the lower one simultaneously, locking in a profit.
You normally associate this with currencies, but there are all sorts of arbitrage opportunities in the market. So, how will this work with Microvision? Let's say the stock is trading at 24 1/2 and the warrants are trading at 12.00. In that situation one could buy the warrants and sell the stock. If the prices converge (say the stock goes to 24 1/4 and the warrants go to 12 1/4), as they should in a rational market, you've made half a point.
Why will this increase volatility? Well, arbitragers don't really care about the inherent value of anything. They make their money off of price differentials, selling the more expensive one and buying the cheaper one. Thus, money can come into and out of a stock without regard to the stocks value. They also make their money trading in volume. This can add up to increased volatility.
I'm not too worried about this. I'm very long on this stock. I just mentioned it because it may be something we'll observe in the future. It's best to prepare for things like that. Otherwise, one might get spooked out of a good investment.
Stephan |
