RB, OFF TOPIC, Re: the academic models. The real problem ,IMO, is not so much in the models, which, by their very nature , are imperfect, but in their interpretation to others by some who really don't understand the very models they are referencing. One obvious area is the failure to notice these models were designed to facilitate decision making by those who can access "the risk free interest rate". Another area is in not understanding that the model provides a means to understand relative values & is not at all predictive of actual values. Another problem I observed in the comments of others, comparing LGND to LGNDW, was preconceived opinions on the "riskiness" of certain instruments without the understanding that the risk or lack thereof was not inherent in the instrument but arose from the price differential between the instruments being analyzed & the conditions of their relationship. For example, it appeared to me that one or more of the commentators thought warrants are always riskier than their underlying stocks. People who actually deal with these things quickly learn that such a thesis is incorrect. For example, my argument is that LGNDW at $6.125 under the stock at the time of the discussion was not more risky than the stock because interest rates of even 8% compounded monthly for the 2 years and 1 1/2 months remaining to expiration would be commensurate with, if not greater than, the $1.00 per share that the warrant holder would lose on his position relative to the stock at expiration. If he lost $1.00 here & got it back there, he had no loss & therefore would make exactly as much on the upside as the stock, but stood to lose less, possibly a lot less than the stock, all the while having to part with less out of his pocket. Yes, all but one figured out the warrants were a better buy than the stock,but posted information that was simply not true in attempting to explain the theories to the threadsters.
Even if we take your 7% interest costs on your margin account, which is probably less than most threadsters command,compound them monthly for the 25 1/2 months left to expiration at the start of the discussion, we should arrive at approximately $1.00 in interest charges saved by not having to put up the $6.125 for the 25 1/2 months.
A warrant that gains penny for penny with the stock on an upmove & can lose no more than the stock on a down move, & might possibly lose up to 40% less than the stock on a down move, & which requires a lower up front payment is clearly not riskier than it's underlying stock. Yet , we saw posts on the VD thread, claiming it was, which claims were backed up with such academic jargon as "greater leverage means greater risk by definition", "the warrant has more risk than an unlevered investment in LGND for the same reason as a margined investment has more risk", " 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", "buying the warrants probably only makes sense if you are already margined to the hilt & want even more leverage","here, most, if not all the benefit (of buying the warrant & selling the stock) is wiped out by the spreads & transaction costs", "the difference (of $6.125 less than the stock) is probably not worth the transaction costs of switching from stock to warrant".
The warrant & $7.12 cents will buy one share of stock. Obviously, if you own the warrant at a price equal to $7.12 less than you would have had to pay for the stock, you will make exactly as much as the stock in an upmove, because if the warrant doesn't move up similarly, you just hand it in to LGND with$7.12 in cash & receive LGND stock, if you so choose. If you buy LGNDW for $7.12 less than the stock, by definition, the stock is riskier because it can decline $7.12 more than the warrant & not appreciate more, yet your position is leveraged with regard to the stock because you control the same upside as the stock & lower downside with a smaller cash outlay.With regard to transaction costs, some brokerage firms are actually advertising NO transaction costs. The liquidity argument against the warrants is solved by short sales of the stock against the warrant position, because the stock is not illiquid. The argument that the spread between bid & asked kills you is countered by the advice to buy the warrants only when available at the appropriate differential to the stock, which was available at the time of the discussion & is intermittently available from time to time.
Let me state for the record that all those who commented on the difference are good, intelligent, admirable people. My argument is not with them but with some items they mentioned which do not comport with the reality that I have observed as a practitioner of the arts they discuss.
Best regards & let's try to find a blackjack emporium whose integrity we can trust, which still offers single deck blackjack with Vegas rules. I'll bring a sack into which we can pour the winnings. |
