Rman: Here are the basics on the Ligand Warrants.
(off the top of head and subject to a huge magnitude of error)
1st, a warrant is issued by the parent company. Since the company is making them, they set the rules (within SEC limits) as opposed to options which have consistant and set standards.
They have a conversion date (expiration). Ligand warrants (lgndw) are due in June 2000. Some warrants can be called (bought back) by the company before the conversion date, lgndw cannot. However, you can convert early if you wish.
1 warrant allows you to purchase 1 share of Ligand Pharm B (lgnd) at the price of $7.125.
lgndw trades on the nasdaq in the same manner as the common.
lgndw is marginable.
The price action of a warrant is similar to an option. The more volatile the underlying stock, the greater the premium. Closer to expiration the premium declines. The Black-Schole pricing model applies, but it's a pain in the ass, and it only tells you if the wts are over priced or under priced at the moment, in relation to the stock. As the options are (usually) thinly traded they tend to follow the price action of the common.
The bid/ask spread can be huge, but it can be purchased inside.
The premium is generally in the 3/8 to 1 1/2 range.
Premium = 7.125-(lgnd-lgndw). Might be easier, but thats how I have it in my real time quote spreadsheet to track the premium.
Fridays close: 7.125-(15 1/4-9)=7/8. However, as lgnd rose at the close lgndw lagged. It closed at 9 with bid/ask at 9 1/8 to 9 1/4.
As lgnd is above the conversion price, the the warrants move at close to a 1:1 ratio with the stock. My guess is 80-90% and it will get closer to 100% as we get closer to the conversion date and farther from the conversion price.
Therefore, if the stock goes from 15 to 25 in the next year (or few days) the wts should go from 9 to 19. 67% increase vs 111%.
The risk is if lgnd goes down quickly on a change of fundamentals and you no longer want it in the VD portfolio, the percentage loss will be of similar size. 15 to 10 common, would be 9 to 4 warrants. Or 33% loss vs 55%.
Personnally (I know, nobody asked), I'm very comfortable (a minor understatement) with Ligands long term prospects. I bought the common years ago and have been adding both warrants and common when I feel they are relatively cheap. Don't ask me to define relatively.
Again, this off the top of my head (probably not the nicest image to leave you with) and any corrections and/or amplifications by any and all are welcome, unless they're really nit-picky, then to hell with ya.
Hope this is of some value.
Dan Ogens |
