Bernie,
If you are assuming you hold only as many warrants as stock, then the warrants will do _worse_ if the stock appreciates, because of the premium you paid, which will be greater than the margin savings.
Basically the Black-Scholes formula already incorporates the interest you make on the amount you save by investing in the warrant rather than the stock. Because these warrants are so deep in the money, most of the fair premium of the warrant is in fact created by this.
There's no free lunch here. To the extent the warrants are fairly priced by the Black-Scholes formula, your expected return is the same whether you buy the options or the warrants. The downside of the warrants is that they are less liquid, which generally means a higher spread, which hurts both when you buy and when you eventually sell. Buying the warrants probably only makes sense if you are already margined to the hilt and want even more leverage.
To the extent the warrants are under- or over-priced, you can make money by buying the warrants and shorting the stock, or vice versa.
Using a stock price of $15.25, a 2 year 1 month term, a 60% volatility and a risk free interest rate of 5.5%, the B-S model gives a fair value of $9.55 for the warrants. The only subjective value here is the volatility - dropping it to 50% gives a fair value of $9.27, raising it to 70% give one of $9.88.
So it looks to me as if the warrants are a slightly better buy using your $9.125 figure, but not enough right now to warrant switching out of the stock and into the warrant.
Peter |
