Initial Warrant Made Easy

Initial warrant

hello everyone welcome back today i've got an educational video for you and this is the most frequently requested topic which is warrants this year is the year of the spax and there's a lot of money that can be made but between the units the shares and the warrants people have a lot of questions well today we're going to be talking about the warrants specifically for beginners if you guys have been investing in them for a while and you feel like you really know what you're talking about then this video might not be the best for you but if you've had a lot of questions and trust me i've received a lot of questions about the warrants just follow this video it's going to answer all the basic questions so you understand when to use them and what exactly they do some of the topics that we're going to be covering are what are warrants exactly and then the redemption price how long they last some of the risks and then cash versus cashless redemptions so i'm going to go into more details with all these and answer some of the other questions but these are the main topics so please like and subscribe usually these videos aren't really uh don't gain a lot of traction so it would be very nice if you guys liked it and kind of shared it if you know someone that needs this information and that kind of shows me that people actually enjoy this type of content so let's get started now thank you for watching [Music] all right guys so let's get started with the basics when it comes to specs there are shares units and warrants today we're only going to focus on the warrants and what are they well they give you the option but not the obligation of purchasing shares from the company for a certain price now they are very similar to call options but a little bit different when it comes to call options you would actually redeem shares from another investor when it comes to warrants you're redeeming shares right from the company itself so you're basically paying the company to get some shares from them in exchange for your warrants usually the warrants are exchanged for eleven fifty dollars but not always the case when it comes to a company like pstas pershing square tontine holdings then everything is doubled and the redemption is 23. but usually it's 11.50 and also when it comes to the ratio of warrants to shares it's usually one warrant to one share so if you have 100 warrants then you could be converting them into 100 shares at 11.50 per warrant now again that's not always the case if you think of a company like graph velodyne for them the ratio was four to three so you would need four warrants to get three shares so again i'll show you where you can find all this information you'll have to like do your own research for every single spag that you look at of course you can look online to find more details or when i talk about them in the videos but you will have to look into the filings to see the specifics for your spec now what's the main benefit of the warrants versus actually just buying shares well the main one is that you get leverage and lower risk so by leverage i mean that when you buy shares for 12 dollars right for every share you have to spend twelve dollars well the warrants are much cheaper at that same time that the shares are twelve dollars the warrants might be two dollars and fifty cents or three dollars well that means that you'll be able to buy more exposure to that stock for the same amount of money in your account so let's say that the stocks at 12 and the warrants are three dollars well at that time you can buy four warrants right so four options to buy those shares for the price of one stock so you have more leverage right as the stock goes up your warrants are going to go up and gain value faster but at the same time you're risking less per share because if you buy a hundred shares at 12 then you're into this stock for 1200 as opposed to if you're buying the option of purchasing these stocks for 11.50 each then you would be into it for 300 so if it goes up right there's unlimited potential but if things don't go your way and it really crashes well then your capped loss is that 300 versus 1200 for someone that goes with shares so they both have pros and cons as we'll talk about in this video but that tells you the really really basic information as to how they work so where do you find all this information well go into google and type in the name of your spac plus filings something like this now one of the first results is going to be the sec click on it if you scroll down find the s1 document you're just going to click on it then it's going to bring this document up which has all the information about the spec right you should be researching this every time but if you keep going down you'll see something like this this tells you that they're trying to raise 287 million 500 000 and as you scroll down you'll find all the information now i want you to scroll down to the section that's talking about the warrants in this case for this spec they say that there's going to be 9 19 million 250 000 outstanding warrants so that tells you the pool of warrants that's going to be in the market so you're going to be buying some of those now exercisability tells you what's the ratio so each whole warrant is exercisable to purchase one share of our class a common stock so this one is one to one right so it's not like graph four to three or ten to one this one is each warrant lets you get one share and the exercise price is 11.50 so let's say that you have 100 warrants it gives you the option of buying 100 shares and to do that it's going to cost you 11.50 per share all right so next we'll look at your cost basis if you were to exercise your warrants and redeem them for shares so we'll talk about them in terms of premium versus discount and if you guys watch my videos every week you know that i often talk about arbitrage opportunities well this is what i mean what is your cost basis it's going to be the price that you paid for the warrants plus the price that we saw in the document which is often 11.50 so in this case if you paid two dollars right for the warrants then you would add that to 11.50 that would mean that your redeemable value right the cost basis that you would have would be 13.50 but is that a good deal or a bad deal well that really depends on what the share price is going to be when the warrants become exercisable it's about 30 days after the merger in that case what you're going to do is you're going to compare your redeemable value what your cost basis would be with what you anticipate the price of the shares are going to be so let's say that your cost basis is 13.50 and you anticipate that the price of the stock is going to be 12 well then you would have had a bad deal you would have paid a premium of a dollar fifty now that's not good in that case you would have just you should have bought shares instead of warrants but it's not always the case very frequently the price of the warrant plus 1150 is actually smaller than the current price of the shares so in that case if you're into this stock long term and you just want to buy and hold it that makes more sense to buy the warrants convert them and then you get a discount which is also called the arbitrage so let's say that the discount is five dollars well then you can say that you have a five dollar arbitrage opportunity and i'm going to show you examples now so here's an example this is ccxx which as of me filming this is going to be voting on the merger fairly soon so this company is trading at 10 25 right now and the warrants are trading at two dollars so is this a good deal are you getting a premium or a discount if you buy warrants right now well what you're going to do is first you have to look at wow what's the ratio and i looked it up already it's one to one ratio and the redeemable price is 11.50 so what you're going to do is you're going to look at the warrant price two dollars and you're going to add the 1150 which gives you a redeemable value of 13.50 then you compare it with the current price of 1025 and you can see that you pay a significant premium for the warrants right now however they're not exercisable yet they're going to be exercisable in about 30 days after the merger so we don't know what the price is going to be at that time right maybe at that time the stock price is going to go up tremendously and it's going to be a discount the warrants but for now you know that they're you're paying a premium if you buy the warrants so another example which would be the total opposite is highly on ticker symbol shll so in this case you would get a significant discount by buying the warrants instead of the shares so as i've been filming this after hours the shares are at 50 25 and the warrants are 25 30. so in this case if you add 11.50 then you get a redeemable price of 36.80 which is a significant discount over the current after-hours price of 50.25 so if you're not too concerned about the risks which i'll talk about in later on in the video right the the movement in the next few weeks of the share price well if you were only going to buy shares right now that you want to owe long term well it would make sense to go with the warrants wait until you can exercise them get your shares and then you would get a significant discount your cost basis would be the 36 3680 versus if you were to buy today your shares would be at 50 25. so i hope you guys understand this right this is the arbitrage opportunity that i was talking about and right now it's pretty severe this is about 14 difference so one last example is going to be uts which already merge so in this case as we can see as we get closer to when the warrants can be exercisable that arbitrage opportunity is going to shrink and there's going to be equilibrium where the warrant plus 1150 becomes the same amount or approximately as a share price so in this case the share price is 1790 and if we go with the us warrant at 654 if you add 1150 to them you get 1804 which as i mentioned is almost the same as the share price so that arbitrage opportunity shrinks as time goes on and then either the warrant goes up or the the price of the shares has to come down to reach that equilibrium usually it's going to be a little a little bit of both and they're going to kind of meet in the middle so now that we're talking about timing i figured i'd mention it here this is what we were talking about earlier one of the main questions that people ask all the time is when can these warrants actually be exercised and usually it's about 30 days after the merger so i'm referring you back to the s1 we were looking at earlier for spartacus right a new spec well exercise period right if you look 30 days after the completion of our initial business combination so this is when you could exercise these warrants if you were buying them for this company as usual you want to look at the filings for this pack you're trying to buy warrants for all right guys this is absolutely crucial you need to pay attention to this because this is something you absolutely need to know how long do the warrants last so as we just saw in theory 30 days after the merger happens you have the option of exercising your warrants to redeem shares but you're not forced to it's an option you're not obligated to in theory you have up to five years to do so but here's the problem is that in almost all of the specs they have a provision in the document that says that if the share price trades above a certain amount usually 18 for 20 trading days out of 30 they have the option of calling all the warrants due they just don't want to have these warrants floating around for years so if the share price is above a certain amount they're just going to call them due if you don't exercise your warrants when they force you to they're just going to be worthless after that you won't have the option of redeeming them so this has happened before people have lost money with it so that's why i'm stressing it out so much especially if the share price above 18 this is something you need to pay attention to so this is what it looks like in the document redemption of warrants once the warrants becomings are sizeable we may redeem the outstanding warrants if and only if the reported last sale price of the class a common stock equals or exceeds 18 per share for any 20 trading days within 30 trading day period so there you have it guys they spell it out in the document right they can force you to exercise your shares so you need to pay attention to it but they will give you a 30-day period where i mean they're they're going to tell you ahead of time that you have to do it all right so we have one last thing talk about when it comes to how long the warrants last and goes back to our discussion earlier about paying a premium or getting a discount so what about a stock like ccxx that's currently trading at 1025 but the warrant's at two dollars does that mean that you should never buy warrants no not necessarily there is a good case to be made and that is if you're bullish on the company long term but in the short term you're really not sure what it's going to do so let's say that you're not sure in the next three months is this not going to go to nine dollars after the merger or is it going to go to 14 but not really spike to 25 30 like one of the other meme stocks but that doesn't mean that you don't believe in the company what if you think that in two years the company is going to be 25 it's going to have a lot of growth it's going to be well established big investors are going to pour in and like buy a lot of shares well in that case like this it could make sense to buy some warrants short term and pay that premium and then you have that long-term exposure to the stock because since it's under 18 dollars it's not going to get called by the company so you have two years three years four years five years for this stock to actually go up significantly and you have exposure to it so you don't necessarily want to invest your 10 25 per share because you're not really sure that it's going to go up quickly but at the same time you want to have exposure to it well that is when it would make sense for you to buy some warrants and then you have exposure to share price if it goes up over time all right guys next up we've got what are some of the main risks involved with investing in warrants so warrants are speculative you can lose some money and here are some of the risks the first one i can think of is if you're not selecting your stocks correctly well after the merger the stocks can just crash and it's going to pull your warrants down significantly and this isn't actually uncommon after the merger it's very frequent for spax to drop significantly and hofv is an example of that that merged a couple months ago and now the stock price is at 249 as i've been filming this and the warrants are 26 cents so if you bought this at the peak when the warrants were maybe two dollars and something well now you're facing an 80 90 loss and is it going to come back within the next five years it's possible but i mean that's a lot of risk and very low reward for you so this is the type of thing that you have to be careful like just because it's a spec doesn't mean that it's going to skyrocket same for the warrants the warrants are great when it's going up but when it's going down it's not going to help you so that's the first risk you still need to be very careful about the stocks that you invest in number two pre-merger the shares have built-in protection that the warrants don't have so all the spanx have money in their trust account that the money is supposed to go to the acquisition target when they find one and they end up merging but if for some reason the merger doesn't go through or they can't find an acquisition target then the money gets redistributed to the shareholders proportionally so it's ten dollars plus the interest that they collected over time so really let's say that that amounts to ten dollars and thirty cents well if you bought your shares for eleven dollars you're really only risking 70 cents per uh pre-merger and also let's say that the stock price goes to nine dollars well again you could just vote against the merger right say that it's overpriced and then you would redeem your shares for ten dollars plus the interest so even though the share went down you could just be protected you have downside protection well you don't have that with the warrants with the warrants if the merger doesn't go through for whatever reason then your warrants are worthless so that's the big risk with them you have to make sure that it's a serious company and that there's no like thing that's going to make the merger fail you need this to go through or your warrants just lose all of their value and then a third risk is that as we get closer to the date where the warrants become exercisable which is usually 30 days after the merger well the problem is that often the share price is going to drop significantly as people anticipate that all these warrant holders are going to be exercising and that's going to dilute the stock so this is something that you have to pay attention to as well it's great that in theory as we saw before like with some of the examples often there's an arbitrage opportunities and you can get a discount but if the stock price drops too much right and the warrants are too expensive you paid too much for them well then something that could have been a discount actually becomes a premium you might have overpaid for them so this is a third risk right it's very very difficult to anticipate what the stock price is going to be when the warrants become exercisable but this is something you have to keep in mind in a case like hylion that i showed earlier that has 16 dollars in arbitrage opportunities well i mean that gives you a lot of leeway but if it was five dollars well then it's very possible that you would have been overpaying if you bought those warrants to exercise them as shares now remember if you're a long-term buy and hold investor and you don't care about what happens in the next couple of weeks right you just want to hold for the next several years well then it doesn't matter because if you were to buy them today for a certain price but you can buy them cheaper with the warrants then that's always going to be the better option but if you're concerned with the short-term price movement then this might be a risk for you so we've covered a lot of ground but there's another question that people ask is cash versus cashless redemption so throughout this video i've talked about the 1150 cash redemption price but that's only one of the options that the companies give themselves they also give themselves the opportunity of doing cashless redemptions so here's the main difference in a cash redemption you're going to be giving them 11.50 per warrant and in exchange they'll trade it one to one for a share but in a cashless redemption let's say the company doesn't need to raise more money and they don't want to dilute the shares as much but what they can do is instead of trading one-to-one right because you're not giving them an extra 1150 they'll just give you a proportion of shares based on the average share price in the last 10 days or 20 days or whatever is specified in the document minus like the redemption price and they'll they'll give you a proportion of shares so instead of being at one to one it might be a 0.5 to 1 or 0.6 to 1. so because of that because you only get a fraction it's going to dilute the sharepool a little bit less so the real formula is a little bit more complicated i'll just list it in the description so you guys can do it if you're really interested in this you'll be able to calculate exactly how many shares you'd get all right in the close let's answer two basic questions that people have asked me very frequently so the first one is hey patrick now i know all about warrants but where are they i can't even find them so sadly in some platforms especially robin hood you can't trade warrants so this is highly on right the ticker symbol on robin hood is shll plus and they do have it in the system but as you can see it says this stock is not supported on robinhood if you go in the search bar and you type shll it's only going to show you the shares so they don't want you to trade it they discontinued the warrants a while ago so if this is something that's important to you you're going to have to use another brokerage so a lot of other brokerages allow warrants e-trade is one of them that's the one i use but fidelity allows it and many others so another question people ask frequently is okay so it's been 30 days after the merger now they're exercisable how do i get my shares if i want to redeem them well what you're going to have to do is contact your broker and tell them exactly what you want and what they're going to do is they'll contact the company and do the process for you and then after a few days the shares are going to be put in your account so for e-trade they charge a 38 fee right they call it the voluntary action and as i mentioned all you have to do is contact them tell them what you want to do and they'll do the process for you so guys i hope i answered a lot of your questions if you have more please list them in the comments or send me a private message and i'll try to explain a little bit more but i hope you enjoy the video i hope this answered a lot of your questions and just let me know what you guys think if you enjoy this type of content please like it really going to help me out and i'll see you guys in the next video thank you so much