I am not very familiar with warrants but it is my understanding that they are basically options emitted directly by the company whose shares are the underlying security of the warrant.
I do not know what exactly happens when you exercise one : is the associated share immediately sold on the market (and you pocket the difference between the pps and the warrant strike price, while the company receives the money of the strike price from the buyer) or can you actually pay the company and keep the share (it'd be weird I guess but financial products can be so full of surprises !)
Now I know you can use it to have more leverage on your investment. I would like to know if I understand exactly how it works so feel free to comment or correct my reasoning. Forgive me if I say banal stuff or if I'm wrong, but I cannot be the only one unfamiliar with warrants so it might be helpful to some people.
Let's say I want to invest 1000$ in the future of VERB. (I will omit the fees in the following calculations)
At today's close price, I can by about 356 shares of VERB (1000/2.81) or 1538 warrants VERBW (1000/0.65). Let us note that 1 VERBW gives you the right to buy 1 VERB (I thinks it's a 1/1 ratio indeed, if not then my calculations are not correct !)
Now let's assume the pps goes up and reaches 15 after some time (anytime before the end of the 5 years of validity), around where we were at the highest post-RS.
If I bought shares, they are then worth 5340$ (356*15) so if I sell I make a profit of 4340$ (5340 - 1000).
If I bought warrant and exercise them, I get 1538 x (15 - 3.43) = 17795$, hence a profit of 16795$ (17795 - 1000).
I could also sell the warrants themselves on the market, whose price should logically be at least equal to the difference between pps and strike price (15 - 3.43 = 11.57) for a similar or higher profit.
Of course, if the pps never goes above the strike price, then I will never exercise the warrants and I might lose more money as it is likely that the price of VERBW would stagnate at best...
I might have forgotten some element, maybe some very important ones, but if my little calculations are correct... I can't help thinking that I should actually by VERBW instead of VERB as I cannot believe for one second that we will not go above the strike price in the next 5 years !
Any thoughts on that ? Are there some risk elements I did not take into account ?
I do not know what exactly happens when you exercise one : is the associated share immediately sold on the market (and you pocket the difference between the pps and the warrant strike price, while the company receives the money of the strike price from the buyer) or can you actually pay the company and keep the share (it'd be weird I guess but financial products can be so full of surprises !)
Now I know you can use it to have more leverage on your investment. I would like to know if I understand exactly how it works so feel free to comment or correct my reasoning. Forgive me if I say banal stuff or if I'm wrong, but I cannot be the only one unfamiliar with warrants so it might be helpful to some people.
Let's say I want to invest 1000$ in the future of VERB. (I will omit the fees in the following calculations)
At today's close price, I can by about 356 shares of VERB (1000/2.81) or 1538 warrants VERBW (1000/0.65). Let us note that 1 VERBW gives you the right to buy 1 VERB (I thinks it's a 1/1 ratio indeed, if not then my calculations are not correct !)
Now let's assume the pps goes up and reaches 15 after some time (anytime before the end of the 5 years of validity), around where we were at the highest post-RS.
If I bought shares, they are then worth 5340$ (356*15) so if I sell I make a profit of 4340$ (5340 - 1000).
If I bought warrant and exercise them, I get 1538 x (15 - 3.43) = 17795$, hence a profit of 16795$ (17795 - 1000).
I could also sell the warrants themselves on the market, whose price should logically be at least equal to the difference between pps and strike price (15 - 3.43 = 11.57) for a similar or higher profit.
Of course, if the pps never goes above the strike price, then I will never exercise the warrants and I might lose more money as it is likely that the price of VERBW would stagnate at best...
I might have forgotten some element, maybe some very important ones, but if my little calculations are correct... I can't help thinking that I should actually by VERBW instead of VERB as I cannot believe for one second that we will not go above the strike price in the next 5 years !
Any thoughts on that ? Are there some risk elements I did not take into account ?
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