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Biotech / Medical : Ligand (LGND) Breakout! -- Ignore unavailable to you. Want to Upgrade?

To: tonyt who wrote (14446)	2/8/1998 11:23:00 AM
From: Flagrante Delictu	Read Replies (1) \| Respond to of 32384

tonyt, >> You did it again. By using the artifice of comparing the "closing bid" instead of the closing price, you managed to remove $500.00 from the value of the warrants. That $500.00 would have negated your argument. Bernie. P.S. The warrants closed at $7. You used a "closing bid" of $6.75. Thus, you derived a value of $13,500.00 for the warrants instead of $14,000.00

To: tonyt who wrote (14446)	2/9/1998 1:51:00 AM
From: Russian Bear	Read Replies (1) \| Respond to of 32384

Okay, Tony, I see what you meant, now. The reason your numbers work out so conveniently, as Bernie has already pointed out, is because you are charging the (rather high) bid-ask spread on LGNDW twice, once to enter at 6 (not 5.625) and again to exit at 6.75 (not 7.) Technically, there is justification for doing so, but in the case of our (highly artificial) example, this convention has the consequence of yielding skewed results. The warrants are not as liquid as the stock. That is a given. Therefore, they make an inferior trading vehicle. Our "long term investor" is not a trader, right? So, let's give him a break, okay? More instructive would be a comparison of the gains of the respective positions, assuming they were all carried into the day (and, thus, valued at the bid both times, as Bernie suggested.) Therefore: If memory serves, LGND was bid 11.25 at the close, Thursday, 12.75 at the close, Friday. That represents a gain on the bid of 13.3% for the day. LGNDW, for its part, was bid 5.625 at the close, Thursday, 6.75 at the close, Friday. That makes for a 20% gain. So, ignoring commissions and (negligible) margin interest for one day, the $6000 investment would have become: 1. $6800 in LGND, unmargined. 2. $7200 in LGNDW, unmargined. 3. $7600 in LGND, margined at 50%. 4. $8400 in LGNDW, margined at 50%. Warrants won that round, 10-8. As for your "long term" model, the one that includes the cost of exercise of the warrants, in 28 months but at the current price, it is inappropriate. The correct valuation model is the Black-Scholes. Period. (BTW, why would anyone buy the warrants if he did not anticipate a dramatic appreciation of LGND within the next 2+ years? For that matter, why would anyone buy the stock? If one anticipates no price appreciation in the next 28 months, I suggest making neither investment.) RB