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Gold/Mining/Energy : Precious metal company Warrants -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (371)	2/4/2006 2:59:35 PM
From: Canuck Dave	Read Replies (2) \| Respond to of 681

If I was wrong on anything below, can one of you correct me? I got a lot of questions from someone about warrants, and sent them a long reply. If any of my reasoning is questionable (or just plain wrong) can anybody correct me? Always willing to learn... CD A lot of questions! And yes, saw your other message. First of all, there's no need to own the underlying stock if you own the warrants. In many cases, they are a superior investment in the same company. It's not like writing covered calls. Second, I have no intention of exercising the warrants unless there is some huge tax reason. The biggest reason I buy warrants is that for pennies I potentially control investments worth dollars. Yes, warrants follow the stock price. The beauty of them is that the percentage moves of the warrants are usually greater than that of the stock. The down side of this is warrants can go to zero, as you can see by some of those expired IVN warrants. Worthless. Now, let's start with how options are priced. They use a system called Black-Scholes which assumes a mathematical formula based on the "intrinsic volatility" (the percentage value seen in that chart of options pricing) of a stock to determine the value at which the odds of it reaching that price by the end of the warrant period is 50%. I looked at the math behind Black-Scholes and it's a random walk diffusion model. So, given two warrants at the same strike price, one expires in 2008, one in 2010, the 2010 one should be higher priced, since there's a greater probability the ups and down of the stock will take it higher in the extra two years. That's why it was bizarre that the EPM "A" warrants traded below the other ones. There are places on the net which will do the calculation for you, but you will have to provide a "volatility" number which brings up a more important issue. Google search "Black Scholes" and play around with it until you get a feel for what's going on. The weaknesses in the warrant pricing scheme are two fold. 1. The "intrinsic volatility" can change, or may not be representative of a stock. NGX trades in a tight range all day, hence has a low percentage of volatility. But, it can make nice daily moves, so the warrants may not be overvalued as the chart indicates. 2. The pricing scheme is a random walk and ignores secular changes which are non-random. That's where we come in. If we think the gold sector is undervalued and about to undergo a bull market, then not only are the gold stocks undervalued, but long dated warrants are a steal. On a particular issue note, I think the EPM warrants are undervalued due to the country risk (maybe). In any event, take "undervalued" and "overvalued" ratings with a grain of salt. And finally, let's face it, they're dangerous. If you're new to online trading, I suggest you only put a small amount of money into them. I've been trading for 8 years now, and only feel comfortable doing it now. I've only invested (risked) a small amount, and am willing to write off any loss I end up taking on the NGX warrants (which expire this year). But, if NGX blows through the strike price ($3), I could end up making a lot on them... Hope that helps, CD