Dan and Rman:
Excellent summary, Dan. The "top of your head" is pretty accurate!
The only thing I would add is that the "delta" of the warrant is dynamic in the sense that it changes with the price movement of the underlying (towards or away from the 7.125 strike,) as well as with time decay. Under the present conditions, it is, indeed, in the neighborhood of 0.9, as you state. However, if LGND were to make a sudden move to 25, the warrants would lose most of their remaining premium, as their delta increased closer to 1.0. Likewise, a sudden move by LGND to 10 (I like the previous scenario rather more) would cause the premium of LGNDW to rise, as the delta fell. In general, any numerical delta is a "immediate neighborhood" approximation of the price sensitivity of a derivative instrument to *very small* (in practice, perhaps 1/2 in either direction) changes in the price of the underlying. It is, effectively, the measurement of the slope of a non linear function at a particular point.
( Dan, I realize that you already know this, and so this little lecture is not directed at you, per se. It is not my intention to be nit-picky, only to illustrate a point for the benefit of those on this thread who may have little or no experience with options and warrants.)
Rocketman, for what it is worth, I believe that LGNDW is a great bargain. I have a very substantial personal position in Ligand Pharmaceuticals, and it is entirely in the warrants. Given that the model is tax-exempt, I believe it makes perfect sense to switch 100% of the Ligand exposure from the common to the warrants (individual thread readers may want to consider the tax implications such action would have on their personal accounts, however.)
You and V1 have decided to shed 700 LGND, and keep the remaining 2100 LGND, representing a continued investment of $32,025 in the company. The opportunity cost of that sum is 3558 LGNDW, and it would be my recommendation (worth what it costs, maybe even twice that) to make the switch. Granted, leverage increases. But, when last I checked the margin balance the MP was carrying, I got the distinct impression that we were not a risk-averse lot. This is a biotech portfolio, after all, not a utility fund, right? ;-) (Alternately, we could opt to go with only 2100 LGNDW, and liberate an additional $13,125 for other uses.)
Regards,
RB
P.S. In case it applies to anyone else on the thread: Happy Easter!
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