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Technology Stocks : IFLY - travel sales on the web pure play -- Ignore unavailable to you. Want to Upgrade?

To: john david martin who wrote (3280)	1/2/1999 1:48:00 PM
From: Arcane Lore	Respond to of 4761

. I also think the demand on the warrants Monday will squeeze that $6 difference to 2 or 3 dollars. I would not be surprised if Monday you see common @ 20 with warrants @ 18. Check out what happened to RMII warrants RMIIW that has a 5 strike price it actually went HIGHER than the commons. While the price of the RMII warrants did exceed the price of the underlying shares by about $4 on Dec. 28 this was not a particularly remarkable situation. The reason is that the warrants were exchangeable for more than one share of stock (the ratio is about 1.42:1 rather than 1:1). In addition the exercise price is $3.07 rather than $5. In general, while the future prices of the stock are very unpredictable, the relationship between the price of the warrants and the price of the stock is very predictable under the current circumstances. Basically the stock is priced well above the warrant strike price of $6.25 and there is a possibility of forced exercise in the very near future. Under either of these circumstances the time premium* for the warrant should be small. When both are present, the time premium is likely to be virtually non existent. While there is a wealth of derivative pricing theory which one could talk about to demonstrate this, perhaps a simple example will suffice. Friday's IFLYW closing price of $6.125 reflected a -$0.125 time premium. Suppose it had reflected a +$4.00 time premium (so it would have sold for $10.25). Suppose one bought a warrant at this price ($10.25). Assuming the price remains above $10 for three of the next six trading days, the company could (and likely would) go ahead and call the warrants. You would then, of course, exercise the the warrant at an additional cost of $6.25 per share (assuming IFLy's price is above $6.25 at the time) ending up with stock which cost you $16.50 per share. OTOH alternatively you could have simply bought the common stock at Friday's closing price of $12.25 per share. Most would prefer buying at the lesser price.<g> Examination of the recent prices of the warrant and underlying stock support this absence of time premium: IFLY: Date Close High Low Open Volume 12/31/98 12.250 13.000 10.125 12.000 381,500 12/30/98 12.375 13.875 10.000 11.750 846,100 12/29/98 13.063 16.500 11.188 16.000 1,449,100 12/28/98 16.125 16.625 9.625 9.875 3,605,600 IFLYW: 12/31/98 6.125 6.750 5.000 6.000 273,600 12/30/98 6.250 7.750 4.375 6.000 749,800 12/29/98 7.000 10.000 5.750 9.875 754,600 12/28/98 10.000 10.000 3.250 3.750 2,349,600 The differences between the closing prices of the stock and of the warrant over these four days were: 12/31 6.125 (time premium = -$0.125) 12/30 6.125 (tp = -$0.125) 12/29 6.063 (tp = -$0.187) 12/28 6.125 (tp = -$0.125) In theory the difference should be at least $6.25, however this theoretical value does not take into account transaction costs (commissions, bid ask spreads, etc.). In addition the closing transactions for the stocks and for the warrants may have taken place at slightly different times. * The price of a warrant or option can be thought of as being the sum of its intrinsic value (the amount by which the current stock price exceeds the strike price - or zero if the current price is less than the strike price) and the time premium.