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hey guys welcome back today's video is going to be a little bit more educational so i'm going to be talking about shares versus warrants versus units i see these questions all the time in the comments for my videos and also on online forums where people aren't exactly sure how they work especially in the units and which one is better when should you choose a warrant over the shares and vice versa so today we're going to be talking about how the spac units work and how they become shares plus warrants then after that i'm going to be talking about the spac arbitrage and how you can use the warrants for leverage then we'll talk about how i use them kind of my strategies how i pick one over another and then we'll go on with some examples i'll pick up a few specs and i'll tell you which what i would do with them so let's get started right now [Music] all right so let's get started by talking about how units become shares and warrants so my michael with this video isn't to make you an expert on every little detail of the specs you might have more questions but you have to understand the very basics so that when i'm talking about the strategies you'll know what i mean and what components i'm talking about so what a company wants to start a spec they file with the sec form s1 which defines how many units they want to sell at what price and how much money they're trying to raise in the ipo from investors so a unit is one share plus one fraction of a warrant so usually it used to be one-third but nowadays it's changing for example psdh bill ackman's spec is giving us 1 9 of a warrant with an extra two ninths if people hold through the merger so the share component of the unit is very easy to understand it's just like any other share from that company but what confuses people are the ones wires are all a bit like stock options if you guys are familiar with calls if you exercise your call option you're going to be getting shares from another investor so nothing new is created you're just trading your money for their shares it's a little bit different with warrants because you're redeeming your warrants for a certain price from the company itself usually that price is eleven dollars and fifty cents not all specs are like this but the vast majority so you'll be trading in your warrants and you'll be getting shares for 11.50 and that process is dilutive because then there's more shares in the market so each share is going to be worth a little bit less so that's why often you'll see when the warrants become redeemable the stock price is going to drop because people know that people are going to be exercising the warrants so what happens next is the sponsor is going to go out and try to raise money from institutions and sell those units so all that money gets put into a trust account and then that money is used to acquire target eventually once they get into an agreement but if they can't get into an agreement then that money gets redistributed to us investors and that's why often i mentioned in my videos that 10 is kind of a floor price before the merger well that's because that's the amount of money that they have per share in the trust account so if you guys bought shares for 10.50 you can assume that there's about 50 cents that's at risk and the 10 is sort of protected by the money that's in the trust account as opposed to if you bought shares for 25 then you have 15 at risk and 10 dollars that's protected so once they account for all of that they're gonna file the form 8k and about 52 days after that that's when the units can be split into shares and warrants so now in the market you'll have units shares and warrants that all trade at the same time all right so this is a website i use a lot to follow the new filings spackinseller.com so they they do a really good job at compiling them so this are the these are the s1s and these are the 8ks so i loaded one up already this is a new company called software acquisition group all right of course it says spac so in their s1 filing we can see that they want to sell 17.25 million units 10 each so a total of uh 172 million 500 000 so you can this is where you'd find how much you're trying to raise and then in the 8k this is red ball acquisition corp it's kind of interesting this is billy beans back so if you went down and you read all this it basically tells you that they were able to sell a certain number of units and they collected a certain amount of money now we can see that red ball acquisition corp rbac unit is actually trading now for a few days right so they've did their filings and now they're on the stock market but only as units no shares or warrants yet eventually like 52 days after they're filing this is where technically they're going to be starting to split between the warrants and the shares so now how do you actually split those right well each brokerage is going to be different so you guys are going to go and see what your brokerage says but for example on e-trade most of them you just have to contact your brokerage and tell them that you want to split them so if i'm not mistaken on any trade i believe that it's 38 dollars for the voluntary action and if you guys complain enough some of them are going to be waiving the fees especially if you're doing fairly often with a lot of different stocks often if you complain enough they'll let you get it for free so now you guys know everything about how the spax are started and now the units transform into shares and warrants so now we can start talking about the actual strategies all right guys now we're getting into the more advanced stuff this is where things get really exciting let's talk about the arbitrage and leverage now remember there's three components that are being traded at the same time you have the units the shares and the warrants and there's a discrepancy between the prices because all three have a different risk profile so depending on the price there's different opportunities that you'll find in each of them so now i can't explain all this just with the powerpoint so i have to show you real numbers but just remember that warrants are usually redeemable for 11.50 keep that in the back of your mind that's going to come in really handy all right so we're going to use two companies to illustrate that leverage in arbitrage i was talking about first one is going to be hyalion which a lot of you already know so each unit of filenon is worth one share plus half of a warrant so you're going to need two units to get one full warrant meaning that the stock price of the unit has to be the sum of one share plus half of the warrant well i calculated already half of the warrant price plus the stock price does equal the unit price in this case but it's not always the case right so it means that in this case for this stock all three components are in sync like they go up about the same however where it gets really interesting which is where like the advanced strategies come in the warrant's at 1202 right now but we know that it costs you 11.50 to redeem one share from the company that means that if you add it it does 23.52 wait a minute that's a lot lower than the current price that's at 29.91 that's about a six dollar discount right why is that well there's two main reasons number one warrants are a little bit more risky than the share price because they don't have that 10 dollar money in the trust account that would get redistributed so if the merger doesn't go through and the stock the spat gets liquidated you wouldn't get your money back so that's why you have to be careful with warrants you have to make sure that it's a company where you're very confident that the merger is going to go through or it's money that you don't care if you lose it like worst case scenario the second reason is people have the anticipation that in the future when they do become redeemable a lot of people are going to redeem them and that's going to dilute the stock and make the stock price go down and because of that they can't pay the full 21.91 because then they would all be overpaying so this is what causes opportunities in the specs is you have these three different components that give you different opportunities all right so i mentioned that they're not always in sync this is hennessey capital four ticker symbol hcac so right now each unit consists of one share of the company and three quarters of one redeemable warrant so if we look at the share price 1043 the warrant price 159 so you would do three quarters of that well the sum of the two is lower than the current unit price so buying the units right now would not be worth it like you would be overpaying for it so this is a case where all three components are not in sync so it would make no sense to buy one over the other you'd go for the cheaper options unless you had a very specific to buy reason to buy units but i'm not aware of that strategy all right guys so before i get into my own strategies i just have to talk about the leverage that you can get from the warrants which is why a lot of the more sophisticated investors pick warrants over regular shares the reason why is if you look at the price of 1202 for hollyon's warrants you can get 2.48 times more warrants for your money than you would shares so that has to be considered because it magnifies your results you're going to get more upside if the stock goes up than you would if you own shares i mean that's a fact so for 163 the stock went up yesterday so the warrants went up 163 which was at 15.69 well the actual share price went up 307 and that was at 11.44 so you can see that the more you have warrants you're going to get that magnification factor and that's where the leverage comes from but it's not always the case you have to be very careful in this case the stock went up enough where the warrants had time to overtake the share price but that doesn't always happen if we look at hennessey capital the share price at 10 43 means that you have about that 43 cents that's at risk it's very close to the floor price but the warrants are at 159 so you can see that you're overpaying significantly for the warrants and the whole thing why people are buying warrants instead of share prices instead of the shares is they they're betting kind of like we say it's an investment but at the same time it's still kind of a bet that the warrants are going to eventually overtake the normal shares right so you have to do a calculation in your mind you have to decide what's good for you and i'm going to share my strategies on how i decide what i'm going to do all right guys so now some talk about my strategies how do i attack these packs well first just remember this is the way i do things i'm just some dude on youtube right you have to adapt it to your own strategies i don't claim to have all the answers this is just how i've been doing it and i've had some moderate success but just keep in mind you have to adapt it to your strategies but with that said the first thing i look at is is it a stock that i want to keep long term do i really believe in their business model and is it something i'm passionate about if so then i'm going to lean towards shares if it's a company that i'm not as confident in or i consider it more of a short-term trade then often i'm going to lean more towards the warrants to get that magnified result and to get that leverage often i'm going to be looking at a time timetable of selling them before the redemption period so a second thing i look at is how much money i want to devote to a stock the more i like a stock the more i'm willing to invest money into it and that gives me more of the way to buy shares because let's say i want to invest ten thousand dollars in a stock well then that lets me buy a critical mass of a few hundred shares as opposed to if i only wanted to have exposure for a thousand dollars into that stock well then i wouldn't be able to buy like several hundred shares i might be able to buy 50 or 100 and to me 100 is the cutoff where i'll never buy less than that because you need at least 100 shares to sell covered calls which is part of my strategy right so let's say that it's a stock i don't care about as much and i'm looking to limit my exposure to it then often i'll go for warrants because my theory is if this stock price goes up a lot then i'll have exposure to it but if it stays flat then i'm not losing much and who knows in the future in two years or three years if the stock really goes up then my warrants are still going to be in play so then after that i drilled down it's more of a case-by-case scenario so one thing is that i look at the stock price let's say it's closer to 10 12 then often i'm going to lean towards the shares because i like the fact that the ratio of money risked before the merger versus the potential gain is a lot higher so yes overall because you're paying 10 something your eventual profit is going to be smaller but your risk versus reward is going to be fairly high if we look at a stock like hcac that's currently at 10 43 while you're risking that 43 cents if the stock price goes up to 1150 well then the money that you risked 43 cents versus the gain uh 1.7 cents you're more than tripled right so you're not going to get that with a warrant the same warrant that's currently at 150 would barely go up if at all it's in fact my it might actually go down if the price only goes to 1150 because the the amount that you redeem the share for is 11.50 so right now you're way overpaying for the warrant versus the share price i hope that makes sense right it's that risk versus reward that i'm looking at with these stocks overall the return is going to be fairly small but when you look at the ratio between money risked versus money gained it's very high when it comes to the shares so another thing i'm going to take into consideration is is it going to be a part of my portfolio that i sell covered calls on and collect premium because if you guys have been following me for a little while you know that this is a big component of my portfolio strategy where i have to sell covered calls and do theta strategies to get premium which i use to buy more long-term buy and hold shares and also to pay my bills right if i want to live off of my investments i need income and the premium from covered calls is part of that but you can't do that with warrants warrants you only make money if the stock price goes up so there are two different strategies if it's a stock i want to owe long term then i can generate income from selling options on it but i can't do that from up from warrants but the warrants are still a big part of my strategy both long term and short term i'll give you two examples number one is if i don't believe in a company very strongly in the short term but i believe that over time they'll do better right so here's a good example burgerfi ops a lot of you guys love this stock but for me i'm not that convinced like we're still in the pandemic so it's tough for restaurants and the better burger is a theme that's fairly competitive so short term like i'm not that excited about the stock i don't want to devote thousands of dollars into it but i still want to have some exposure to it so what i'll do is i'll buy warrants especially at the very low right when the stock's beaten down as much as possible i'll buy some warrants with the expectation that over the next five years because that's how long the warrants last over the next five years the stock's going to recover and eventually they'll do well so let's say that the stock price ends up going to 20 dollars in two years well my warrants the results are going to be magnified like i have more leverage than if i had bought shares which for like two years wouldn't have done much so this is my strategy for long term like if it's a stock i don't believe in as much in the short term then i'll go for warrants and have a small exposure to it but warrants are also very good when i expect a short-term spike in price especially leading up to the merger or when the letter of intent is signed we were thinking of highly on earlier right now when that period where the stock is going towards the merger so it's starting to trend up significantly and what did we see we saw that the warrants on a percentage basis are going up faster than the share price well this is when i would veer towards the warrants to get that magnified result so let's say that you don't plan on keeping these shares after the merger and after the redemption like all you're looking for is a short-term trade well that's when i would look for warrants so in a lot of cases if it's a company that i want to have long-term but i also want to exploit the short-term like boost and price i'm going to do both i'm going to have some shares the part that i want to keep long-term and then i'm going to have warrants i just want to dump after the merger all right guys so let's look at some examples and that's going to tie in everything we've been talking about first up we have lca this is a company where i bought shares instead of warrants and i can't believe i only got 200 so far i need to buy more but the reason why i went with shares over warrants is that it's a company that i want to keep long-term and i'm going to be using it as my cash cow right i'm going to be selling calls on it and i'm going to be collecting that premium every week or every month depending on how they structure it so i couldn't do that with the warrants so it made sense to me to buy them as shares right so i bought these under 12 and i still need to get more number two we've got ops we talked about this one earlier this is a company where i bought warrants instead of shares because i don't really believe in it that much short term but i still wanted to have exposure to it so i only wanted to like put around a thousand dollars right or not too much so i bought 500 warrants paid 140 each so i'm up already 48 with it so if they recover long term and do well like if they go to 20 bucks i'll get a pretty good return without having risked much now we have shll highly on i actually bought warrants on friday i paid full price so this is not great right they were six dollars a week or two ago but i still have my shares that i want to keep long-term i just figured i i wanted to compound it a little bit more just buy a few more uh just get a little bit more exposure to it so i bought some warrants with the express purpose of if this stock goes up to 40 or 45 which is my price target or if it exceeds it i'll just sell the warrants and never look back and just keep my my shares right so by buying warrants i just get that extra home that extra leverage that i was talking about earlier so instead of paying nine thousand dollars for 300 shares look i have 300 warrants but it only cost me 3 600. so it didn't cost me as much to get almost the same exposure then this is jws this is an interesting case i want to show you more of a short-term spec play this one is already closed i sold it already i had bought these with the express purpose of if they signed that letter of intent that would have made the price spike a little bit and then i would have sold the warrants so this was more like short-term capital gains type play so this one i bought 600 shares uh 600 warrants sorry paid 190 to 225 so i was into it for 1300 and i sold it nine days later for 265 right so i made like 275 dollars onto it for our risk of 1300 so about 20 profit in nine days so it could have been a little bit more they went up to 320. i'll be honest with you guys i mistimed this one i sold it too early but still i mean it's a twenty dollar twenty percent gain in nine days it's not too bad so this is the type of thing that you can do with warrants you can do those short term plays and you'll still get a high percentage gain if it goes your way right if i had bought shares of this i wouldn't have gotten nearly as much money so it really depends like if you're looking for a short-term play you can go for warrants if you're looking for a long-term play often i'll be going more for shares all right so before i wrap up i just wanted to show you guys a live opinion on a stock that i haven't analyzed before and now i would approach it so this is diamond peak holdings corp which is going to be merging with lordstown when i did my review and you can see in the description i mentioned that for me that was dead money so i wasn't going to invest into it right now but let's say that i wanted to invest into it what would i be looking at well right now the stock price is 1334 and the warrant price is 410. so if you add the 1150 you can see that the redeemable value for the warrants is going to be 15.60 as opposed to the share price is 13.34 so if i was to invest in the stock right now right now i would be looking at the shares personally because eventually i would be able to sell covered calls on it and everything and i feel like i would be getting a better value now the reason why someone would go for the warrants is if they expect that the share price is going to go up significantly and overtake the warrant price remember the further out we go from the for price of 10 the more the warrants become better value but for now with the stock price where it is i think that the stock price would be better value so for me personally i'd be going with the share so guys i hope this really helped you i know this type of topic's a little dry right it's not as exciting but you have to understand the strategies to really benefit and make money in the stock market so i hope that this video helped you if you liked it please comment below if you hate it please comment below i love your feedback i'm sure you'll have more questions just ask away i love answering so i'll see you guys in the next video