Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Robert Cohen who wrote (16346)	3/3/1998 4:58:00 PM
From: Flagrante Delictu	Respond to of 32384

Robert, >> What would cause the time value of LGNDW to drop, etc?. << The valuation models used by most derivative traders are based nor only on the intrinsic value of the relationship between LGND & LGNDW, which at expiration will price the stock at $7.12 over the warrants, but also time left to expiration, the "risk-free" interest rate, & a factor by which they use to measure the implied volatility. What they don't consider, per se, {sorry about all the Latin recently} is the possibility of a different amount of either buying power or selling pressure between the 2 instruments. They assume an arbitrage will narrow these differences. Over time, that's a logical assumption. It looks like that there may currently be an outsized urgency to sell wts. compared to stock. Whether that's temporary, remains to be seen. In my opinion, it almost certainly is. The current pressure on the warrants has created an interesting opportunity for those who prefer to, or have to, trade using as little cash up front as possible. That opportunity is here now because professional option players impute a lower cost of interest than is available to most of the public. For example, since the pros can borrow money from their clearing house at around 6% & the public is lucky if it can get margin interest at 8% compounded monthly, and since the options are priced via the pro's model which can price them at 3/4 of the interest charge the public is assessed, the options are currently priced below the public's cost of carry. Additionally, most pension assets cannot be invested on margin. Yet, an alert pension manager can buy the wts. instead of the stock and avoid having to put up around $6.375 currently. If one calculates the value of having $6.375 available to invest in LGND or some other stock for the next 2 1/4 years { from now 'til 6/3/00 } at an 8% simple interest rate, he has effectively saved $1.15. Yet, his cost of buying the wts. at 6 3/8 less than the stock is the difference between that 6 3/8 & the 7 1/8 he will have to deliver to get back the stock on 6/3/00. He saves $1.15.at a cost of 75 cents. Not a bad deal. But wait, it's even better. He can only lose what he paid for the option, e.g. 8 7/8 instead of 15 1/4 on the stock, should the co. go out of business. Of course, he must buy the wt. on the bid & sell the stock on the offer to get this good a deal, but even that is possible if he legs into the trade {IYWPTE}. Even if he buys the wt. at only $6.12 below the stock, the numbers are in his favor. Lastly, the volatility estimate is merely a guess as to the future action of the stock. This, IMO, is the fly in the ointment of the pricing model. It presents those of us who think the range will be greater than in the past to buy for less than it would cost had the model used the same valuation estimate we would. Hope this helps. Bernie. P.S. The wt. sold at 5 at the bottom of the move on a half-point discount to accomodate the large block. The wt. couldn't really be bought there by the public. Torben's buy at $5 1/2 was as low as could be reasonably expected. At that low price in the stock & wt., the wt. was selling at a premium of between 1 1/2 to 2 dollars to the eventual $7.12 less than the stock that it will be worth on 6/3/00 ,because the volatility estimate at that great level of fear had to impute a great value to the fact that the wt. couldn't decline as much in dollar terms as the stock could. In fact when one buys the wt. instead of the stock, it is equivalent to buying the stock PLUS a put with a strike price equal to $7 1/8 on the stock. Right now, the mms are not pricing in the value of the put because they see clear sailing for LGND. That is one of the reasons in addition to the existence of a wt. seller that is temporarily holding back the wt. price. Once again, I must admit I control a very large wt. position. So, consider that I may be talking my position, when you read what I have to say.