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Technology Stocks : Nam Tai Elec. (NTAI) -- Ignore unavailable to you. Want to Upgrade?

To: DanD who wrote (1304)	3/26/1998 2:34:00 PM
From: David Leith	Read Replies (1) \| Respond to of 1696

Dan, I agree with you that reducing the volatility measure is one approximation of what the warrants are worth, especially as they are far out of the money. And yes, there is a small chance that the stock price could shoot up past the $25.50 point, and that the warrants would have a (momentary) value higher than the $5.10 I hypothesize. But there are reasons to think that the Nam Tai warrants aren't trading in correlation with the stock price, as is predicted by Black Scholes. One reason is the cap. Another is the fundamentally skewed distribution in expected returns (it is unlikely that the stock is going to drop, given the cash and buy-back plan). A third is the dividend. My point is, unlike a traditional option, this warrant has an uncertain duration. For one, no one can know whether the company is going to call it at the point when it is allowed to call it. Secondly, approximating how long it will be before it is callable (as a proxy for the actual duration) results in a distribution of durations. Luckily, in valuing the warrant, the time value discount is relatively insignificant. More important is assessing the cap. My supposition is that (a) the company is unlikely to wait very long to call the warrants and (b)that once called, the stock will trade down. So I guess my practical advice is, should the stock exceed the $25.50 price -- first assume that the time value of the option is nil -- and second, sell it to the first available buyer if you can get a good premium over its intrinsic value. For once its called, the time value will be nil, and the intrinsic value is going to decline with the stock. With the warrant still out of the money, the difference in the valuation models is not much. But as the stock hits $20 or $22, in my mind those who then pay over $5 for the option will have made a suckers bet. IMHO. David