Tony,
<<If you want to throw risk-management into the mix, then you must also consider using options to contol LGND, not just warrants. You must also quantify the risk of LGNDW falling below marginable limits, the risk due to liquidity (which, btw is unusual if warrants are such a good deal), and the wide spread (due to it being thinly traded.>>
I agree with everything you wrote here, except the reference to options. In my view, Ligand warrants are a legitimate investment vehicle (as would be LEAP calls, deep in the money, if they existed for LGND,) because they are long-term, and are sufficiently in the money to have a "delta" near 1. No other suitable options are available for this stock, at this time. In general, I consider options that do not meet the above two criteria a means of hedging or speculating, not investing (you may or may not agree.)
<<I just commented (in the message that you responded to) that even if 2x as many warrants were purchased on margin, the stock is still ahead by $125.>>
I don't understand what you meant by that. Given that LGNDW clearly outperformed LGND on Friday (24% vs. 14%,) how can a double-weighted LGNDW position have been inferior to a double-weighted LGND position on that day? Maybe, I misunderstood what you were trying to convey.
<<I'll ask you to please provide the correct financing model for a long term investor who wants to control 1000 shares of Ligand.>>
The condition you are setting, "...wants to control 1000 shares of Ligand," ensures that yours is the right answer. Within the next 28 months, the time premium in LGNDW will necessarily decay to zero. Thus, in your scenario, it will *by definition* be cheaper to avoid paying that premium by going the common stock route. Even with margin. That is a truism. But, the one you pose is not the only relevant question, in my view. Another, question, equally valid, is whether or not LGNDW is appropriate for a long term Ligand bull with a given amount of money ( on margin, or otherwise) to invest.
Bernie was absolutely correct in his insistence that the warrants are *not* overpriced, and that the relevant financial model for determining fair value is the Black-Scholes. I was objecting to your model only in so far as you were using it to imply that LGNDW was overpriced relative to LGND. Using Stewart's link to that uncommonly user-friendly Black-Scholes calculator (thanks again, Stewart,) www2.wallstreetnet.com, fair value for LGNDW, as of Friday's close, I compute at 7.65. Thus, if anything, the warrants are *undervalued,* by over 8%, relative to the underlying. That is simply a fact of mathematical finance.
Nevertheless, I agree that the subject of your hypothetical, who wants to control 1000 shares of LGND -- no more and no less -- does best to simply buy common. But, bear in mind that one of the main benefits of the warrants -- their leverage feature -- does not interest him. It *does* interest me! And I am confident that I am *not* overpaying for that feature at current prices.
RB |
