BAC-WT - Bank of America Warrants

[Kraven]

Hi,

 

Can anyone recommend a broker through which I can buy these warrants? Currently I am using Merrill Edge, which is crap, but I get free trading and so I use it. I don't think I am able to buy the warrants through it, unless I am mistaken. So through what brokers have you all bought the warrants?

 

Thank you!

 

There is nothing special about these warrants.  You should be able to buy them through any broker.  Just make sure you have the right symbol.  Just call them up and ask.

[tombgrt]

Does anyone know where I can see the price history of the warrants for more than the last 5 days? Or isn't that possible?

 

 

I own BAC common stock now but nothing prevents me from buying some BAC-WTA when utter despair hits the markets.

[enoch01]

Does anyone know where I can see the price history of the warrants for more than the last 5 days? Or isn't that possible?

 

 

http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/chart/?qm_page=25639

[tombgrt]

Thanks enoch.

 

Why are the warrants less volatile lately? The BAC-WTA gained less from low to latest high than common stock!  :o

 

 

 

[tombgrt]

Also, how do I measure time value for warrants?

 

Because if I just look at what returns (not adjusted for dividends) can be when just looking at end value in 2019 the difference in performance is really weak. As long as BAC trades under $30 in 2019 there is almost no extra return with the warrants it seems.

 

For example:

 

Bought at price common $6 or price BAC-WTA $3 (seems about right):

 

2019 price $15

common -> 2,5x

warrants -> 0,56x

 

2019 price $20

common -> 3,3x

warrants -> 2,23x

 

2019 price $30

common -> 5x

warrants -> 5,56x

 

2019 price $40

common -> 6,67x

warrants -> 8,9x

 

2019 price $50

common -> 8,3x

warrants -> 12,23x

 

 

Looks like you can only have a reasonable chance of doing much better with the warrants if the time value is high and you sell at an opportunistic time. But I assume this is the case and there is significant time value present? Can anyone give me an indication and am I missing something else?

 

[pilaniman]

 

Looks like you can only have a reasonable chance of doing much better with the warrants if the time value is high and you sell at an opportunistic time. But I assume this is the case and there is significant time value present? Can anyone give me an indication and am I missing something else?

 

 

Think of these warrants like any other option which has two components: intrinsic value (strike price - stock price) and time value. There is no intrinsic value is these warrants because the strike price (or conversion price for the warrant) is significantly higher than the current stock price. What you see is ALL time value of the warrant because it has eight yrs to expire. The BAC warrant is similar to a long-term out-of-the-money call option.

 

I have not seen a robust option valuation method for long-term options like these but directionally as the time goes by, it will lose time value (called time decay) and as the stock price of BAC gets closer to the conversion/strike price, the warrant will increase in value. The moves are not linear.

 

Hope it helps.

 

[rranjan]

Thanks enoch.

 

Why are the warrants less volatile lately? The BAC-WTA gained less from low to latest high than common stock!  :o

 

Supply demand equation might have something to do with it. Also when volatility is high you will get spike in call/put price so if BAC went down a lot in short period due to high volatility then call/warrant will not go down in same proportion. It has to do with the way call/put/warrants  are priced.

 

As far as commons making more money than warrants till price reaches $30, you are forgetting one thing. In your example you can buy two warrants or one common by spending $6. When you compare warrants vs common breakeven point then you have to take this into account. having said that , the risk is also different in two scenario.

[tombgrt]

Thanks guys, makes sense!

 

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

 

It's late here so I could be saying some very wrong things.

[rranjan]

Thanks guys, makes sense!

 

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

 

It's late here so I could be saying some very wrong things.

 

Not sure about what you are trying to convey but using your numbers as example,

 

If you spend $6 to buy common --> at $30 you make $24 bucks profit.

If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

 

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.

[ERICOPOLY]

A while back I switched to the common from the warrant.  And I have some out of the money calls as well.

 

Are you really going to want to remain 2:1 levered in the warrant when the stock is no longer trading with any perceived margin of safety?

 

You can go out and find a fairly valued stock pretty much anytime you want and lever it 2:1.  It doesn't feel very good.

 

That's where you'll be at when the stock is at $26.60.

 

Think ahead -- how will you really behave when you are at that point?

 

Let's say BAC is trading at $26.60 tomorrow morning.  Are you going to say it's time to load up 2:1 or are you going to say that you are a value investor and you'd rather be finding 50 cent dollars because of the margin of safety?

 

 

 

[tombgrt]

Thanks guys, makes sense!

 

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

 

It's late here so I could be saying some very wrong things.

 

Not sure about what you are trying to convey but using your numbers as example,

 

If you spend $6 to buy common --> at $30 you make $24 bucks profit.

If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

 

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.

 

Jup, that was what I meant. Thanks for the confirmation.

 

A while back I switched to the common from the warrant.  And I have some out of the money calls as well.

 

Are you really going to want to remain 2:1 levered in the warrant when the stock is no longer trading with any perceived margin of safety?

 

You can go out and find a fairly valued stock pretty much anytime you want and lever it 2:1.  It doesn't feel very good.

 

That's where you'll be at when the stock is at $26.60.

 

Think ahead -- how will you really behave when you are at that point?

 

Let's say BAC is trading at $26.60 tomorrow morning.  Are you going to say it's time to load up 2:1 or are you going to say that you are a value investor and you'd rather be finding 50 cent dollars because of the margin of safety?

 

 

Of course, I agree. Just looks to me you get all the leverage here without any significant extra upside when the most obvious gap is closed (from here to $15-25) and after that it is just silly to own the warrants anyway as you mentioned.

 

Do you own WFC Eric? Common or warrants? The story could be different there regarding the upside of the warrants.

[ERICOPOLY]

I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

 

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage

 

 

 

 

 

 

 

 

 

 

[tombgrt]

Probably the same situation yes. Even when WFC is still reasonably undervalued at $50 in the future, the risk/reward profile seems inadequate.

[enoch01]

I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

 

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage

 

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.

[ERICOPOLY]

I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

 

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage

 

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.

 

It takes only the current asset base growing at 3% a year for the next 7 years.

 

They could earn $4 right now if losses were normalized and yield curve looked better.  The company stock could trade at 12x earnings.  That gets us to $48 per share.

 

Then let's say they buy back 3% of shares a year for next 7 years.  That gets us to $60 per share.

 

Then let's say they grow business/assets by 3% a year.

 

That gets us to $75 per share.

 

[enoch01]

 

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.

 

It takes only the current asset base growing at 3% a year for the next 7 years.

 

They could earn $4 right now if losses were normalized and yield curve looked better.  The company stock could trade at 12x earnings.  That gets us to $48 per share.

 

Then let's say they buy back 3% of shares a year for next 7 years.  That gets us to $60 per share.

 

Then let's say they grow business/assets by 3% a year.

 

That gets us to $75 per share.

 

Fair enough.  With certain assumptions on buybacks, yield curve, and market valuation, the asset base only needs to increase about 25%.  Those inputs have a pretty wide range though.

[meiroy]

Thanks guys, makes sense!

 

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

 

It's late here so I could be saying some very wrong things.

 

Not sure about what you are trying to convey but using your numbers as example,

 

If you spend $6 to buy common --> at $30 you make $24 bucks profit.

If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

 

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.

 

there is a pretty good chance when bac hits $30 there will be 4 years of time value left on those warrants. maybe 5. to give you an idea of what can happen, Paulson's original bac thesis called for a price of $30 in 2011/2012 time frame. The company has enormous earnings power.

 

Going over the last few posts, I find myself somewhat confused. My understanding is that the play with these warrants is for the [hopeful] extra time value on top of the basic value, and not to be held till expiration. In Ericopoly's example, if we say it happens well before the expiration date, than surely conversion to the common will not be considered and due to the extra time value the warrant itself should be sold.  (In addition if it's at 50 or whatever, the warrant has the protection if for example the common crashes to 10 you "lose" 40 while on the warrant it's just the 8.5 or whatever it is now. Of course that's temporary loss compared to actual loss of capital) (EDIT: pardon, I was using the WFC-WT values)

 

Please clarify, thanks.

 

[ERICOPOLY]

Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

 

[meiroy]

Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

 

Got it. Thanks!

 

So, if everyone and their grandma are holding onto this (assuming it would be actually worth it to hold it in the first place), and will probably sell it at a certain time frame, who would buy it on the other side? For whom such a warrant would be valuable? Could it be for the issuing entity itself?

[rranjan]

Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?   What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

 

Given the low interest rate right now, 5% annualized time value should not be too low. Equation might change a bit if we get a spike in interest rate but I don't think fed would allow high interest rates for few years. I hold commons, warrant and leaps in different accounts. Leaps might run out of time but they can be rolled over at right price. Commons and warrants should have roughly same returns but warrants might provide bit better returns. Difference should not be very huge though. Off course, the commons have less risk than the warrants but 7 years is long time.

 

For WFC warrants, you lose lot in dividend ( roughly $9 bucks) so I hold commons for WFC and will buy some leaps. Well, WFC is not so cheap but more safe. It still gives 15% annulized returns from here with very average scenario. Though warrants will give more upside if WFC does reasonably well.

[rranjan]

Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

 

Got it. Thanks!

 

So, if everyone and their grandma are holding onto this (assuming it would be actually worth it to hold it in the first place), and will probably sell it at a certain time frame, who would buy it on the other side? For whom such a warrant would be valuable? Could it be for the issuing entity itself?

 

These warrants have enough liquidity. Warrants does not have to be necessarily very valuable to get buyers. Taking account of interest rate even a thin margin will be enough to have buyers. Just leave something for the next owner. Only question you need to ask - if you will get any love for bank stocks in next 7 years? Most of them are priced for doom and gloom so even a average scenario will produce good returns. I am not banking on better than average scenario for making investments but last few years loans have much higher quality but no one is giving any credit for that at this moment.

[returnonmycapital]

I have bought BAC wts (class A) with 13.30 strike at an average of 2.75. I have also bought BAC pfd (series L) at an average price of 750 (yield 9.67%). Per $1,000 par of pfd., I have bought 75 wts per par of pfd (1,000 / 13.3 = 75). This has created a reasonably low strike convertible pfd security. My total cost per $1,000 par is 956.25 which earns close to 7.6% yield. My assumption is that the pfd. will eventually trade at par and the business will eventually earn 1% on assets of about $150 - $200 per share (putting the common fair value at about $20, imo, given interest rates today). 

 

The wts currently trade at about 45% premium to the stock. I expect that premium to decline approx. 6% per annum. Netting out the premium decay fromt the pfd dividend receivable gives a net 1.6% yield. Which gives a 1% yield advantage over the common. Should dividends increase on the commn, the wt strike will decline $1 for $1 (unlike WFC wts). This hedges, to some extent, the wt's premium decay.

 

If the pfd is money-good and eventually trades at par, this operation should result in profit, even if the wts expire worthless. If you leverage the pfd., with an attractive spread and it proves to be money-good and the common gets through the strike price by 2019, this should offer a superior operation to holding the common. And finally, because the series L pfd is already a perpetual convertible, should the common later rise well past $20, you might get some extra kick from the pfd rising through par. Example, given a $750 pfd cost, option breakeven on the common is $37.50 per share.

 

And, while not wanting to dwell on the negatives, it's no small thing to have even marginally better terms to the common in any prospective liquidation scenario.

[ERICOPOLY]

I wrote a script to illustrate my thoughts on the leverage in the warrant.  I did this because I wanted to see how much leverage the warrant really brings to the table vs the common.

 

The script compares a margin-leveraged common stock position to the warrant.  It assumes that you hold the warrant to maturity and provides the return as if the warrant had just expired -- and the leverage you would need to hold if you were to take delivery on the shares rather than sell the warrants.  It tells you how much leverage you have at any given stock price.  Unfortunately the script is a bit unrealistic in that it assumes the margin interest rate is 0%.  So it will overstate returns from the stock to some degree.

 

The script assumes that whenever the stock goes up by a full $1 you buy more shares to maintain the target (initial) level of leverage.  So as the stock rises (or when dividends are paid) you keep on buying, but if the stock drops you hold onto the shares (never selling).  The idea is to maintain the starting leverage level.

 

Stock price begins at $6.49 and warrant price at $3.14.

 

The output from the script with 1.2x stock leverage.  The warrant doesn't catch up with the leveraged common until $45 is surpassed.

 

C:\Users\*****>cscript bac.js 1.20

Microsoft ® Windows Script Host Version 5.7

Copyright © Microsoft Corporation. All rights reserved.

 

 

INITIAL STOCK LEVERAGE: 1.20

 

BAC: $7  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 1.09 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $8  STOCK_LEVERAGE: 1.173 STOCK_RETURN: 1.28 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $9  STOCK_LEVERAGE: 1.178 STOCK_RETURN: 1.48 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $10  STOCK_LEVERAGE: 1.180 STOCK_RETURN: 1.67 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $11  STOCK_LEVERAGE: 1.182 STOCK_RETURN: 1.87 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $12  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 2.08 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $13  STOCK_LEVERAGE: 1.185 STOCK_RETURN: 2.29 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $14  STOCK_LEVERAGE: 1.186 STOCK_RETURN: 2.50 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22

BAC: $15  STOCK_LEVERAGE: 1.187 STOCK_RETURN: 2.71 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54

BAC: $16  STOCK_LEVERAGE: 1.187 STOCK_RETURN: 2.93 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86

BAC: $17  STOCK_LEVERAGE: 1.188 STOCK_RETURN: 3.15 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18

BAC: $18  STOCK_LEVERAGE: 1.189 STOCK_RETURN: 3.37 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50

BAC: $19  STOCK_LEVERAGE: 1.189 STOCK_RETURN: 3.60 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82

BAC: $20  STOCK_LEVERAGE: 1.190 STOCK_RETURN: 3.83 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13

BAC: $21  STOCK_LEVERAGE: 1.190 STOCK_RETURN: 4.06 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45

BAC: $22  STOCK_LEVERAGE: 1.191 STOCK_RETURN: 4.29 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77

BAC: $23  STOCK_LEVERAGE: 1.191 STOCK_RETURN: 4.52 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09

BAC: $24  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 4.76 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41

BAC: $25  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 5.00 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73

BAC: $26  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 5.24 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04

BAC: $27  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.48 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36

BAC: $28  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.73 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68

BAC: $29  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.97 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00

BAC: $30  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 6.22 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32

BAC: $31  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.47 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64

BAC: $32  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.72 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96

BAC: $33  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.97 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27

BAC: $34  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.22 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59

BAC: $35  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.48 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91

BAC: $36  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.74 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23

BAC: $37  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 7.99 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55

BAC: $38  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.25 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87

BAC: $39  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.51 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18

BAC: $40  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.78 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50

BAC: $41  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.04 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82

BAC: $42  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.31 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14

BAC: $43  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.57 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46

BAC: $44  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.84 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78

BAC: $45  STOCK_LEVERAGE: 1.196 STOCK_RETURN: 10.11 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10

 

 

Then I ran it again with 1.15x leverage -- warrant catches up with the leveraged common at $35.

 

C:\Users\*****>cscript bac.js 1.15

Microsoft ® Windows Script Host Version 5.7

Copyright © Microsoft Corporation. All rights reserved.

 

 

INITIAL STOCK LEVERAGE: 1.15

 

BAC: $7  STOCK_LEVERAGE: 1.138 STOCK_RETURN: 1.09 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $8  STOCK_LEVERAGE: 1.130 STOCK_RETURN: 1.27 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $9  STOCK_LEVERAGE: 1.133 STOCK_RETURN: 1.45 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $10  STOCK_LEVERAGE: 1.135 STOCK_RETURN: 1.64 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $11  STOCK_LEVERAGE: 1.136 STOCK_RETURN: 1.83 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $12  STOCK_LEVERAGE: 1.137 STOCK_RETURN: 2.02 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $13  STOCK_LEVERAGE: 1.138 STOCK_RETURN: 2.21 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $14  STOCK_LEVERAGE: 1.139 STOCK_RETURN: 2.41 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22

BAC: $15  STOCK_LEVERAGE: 1.140 STOCK_RETURN: 2.61 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54

BAC: $16  STOCK_LEVERAGE: 1.141 STOCK_RETURN: 2.81 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86

BAC: $17  STOCK_LEVERAGE: 1.141 STOCK_RETURN: 3.01 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18

BAC: $18  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.21 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50

BAC: $19  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.42 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82

BAC: $20  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.63 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13

BAC: $21  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 3.83 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45

BAC: $22  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 4.04 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77

BAC: $23  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 4.26 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09

BAC: $24  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.47 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41

BAC: $25  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.68 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73

BAC: $26  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.90 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04

BAC: $27  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 5.11 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36

BAC: $28  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.33 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68

BAC: $29  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.55 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00

BAC: $30  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.77 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32

BAC: $31  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.99 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64

BAC: $32  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 6.22 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96

BAC: $33  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 6.44 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27

BAC: $34  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 6.66 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59

BAC: $35  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 6.89 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91

BAC: $36  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.12 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23

BAC: $37  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.34 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55

BAC: $38  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.57 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87

BAC: $39  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.80 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18

BAC: $40  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.03 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50

BAC: $41  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.26 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82

BAC: $42  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.49 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14

BAC: $43  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 8.73 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46

BAC: $44  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 8.96 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78

BAC: $45  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.20 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10

BAC: $46  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.43 WARRANT_LEVERAGE: 1.407 WARRANT_RETURN: 10.41

BAC: $47  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.67 WARRANT_LEVERAGE: 1.395 WARRANT_RETURN: 10.73

BAC: $48  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.90 WARRANT_LEVERAGE: 1.383 WARRANT_RETURN: 11.05

BAC: $49  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 10.14 WARRANT_LEVERAGE: 1.373 WARRANT_RETURN: 11.37

 

[beerbaron]

I'm not sure I understand you process here Eric. Can you help elaborate?

 

Thanks

BeerBaron

[ERICOPOLY]

I'm not sure I understand you process here Eric. Can you help elaborate?

 

Thanks

BeerBaron

 

Just figuring out the return of the warrant vs other forms of leverage. 

 

The trouble I have with the warrant is the high strike.  Meaning that if you hold it all the way until $45 per common share (maybe 7-10 years including warrant exercise), you'll be in a highly leveraged position the entire time.  Even at $45 you still have 1.42x leverage.  When it gets just a few years from expiration it will be a nail biter. 

 

Would it feel better to start out leveraged common at a very low price and have the leverage wind down as the stock price rises?  The trick is finding leverage that isn't risky at this low price.  I guess there is call options but it's expensive leverage.

 

Here is another output (below) where you start off with 1.5x leverage in the common and let it wind down to 1.1x and keep it there.

 

Note that this strategy takes on 1.5x when the stock is very discounted versus the warrant strategy which is still 1.5x leveraged when the stock is at $40 and 1.8x leveraged at $30.

 

Would you rather be 1.5x leveraged today at $6.49 when a margin of safety theoretically still exists and have it wind down to just 1.2x leveraged at $13 (the strike of the warrant) and then let it fall to 1.1x by $23 per common share?  Or would you rather have the warrant strategy and be 20x leveraged at common price of $14, 1.8x at $30, and be 1.5x leveraged at common price of $40?

 

I mean, the risks are different of course.  You can't leverage in the common completely safely unless you buy puts (expensive).  That's why I modeled it with 1.2x leverage as it takes a very large plunge to generate a problem.

 

But it's interesting to learn that 1.2x constant leverage throughout is the same as taking on 1.5x initially and winding it down to 1.1x through natural decay.

 

The thing is, the warrants look great if you assume very high prices -- but how good will it feel to be 1.8x leveraged at $30?

 

I'm just trying to work out to myself what will be the easier and smoother ride.  How risky is 1.2x really as an initial holding in the stock, and if I maintain that throughout I can get the same return at $45 per common share as the warrant.  The warrant will be relatively very volatile and bumpy when the time to maturity approaches -- can I have a better ride in another vehicle?  That's my question, and I'm just modeling the alternatives.

 

Here is 1.5x initial leverage that is naturally decayed to 1.1x leverage and then maintained.  It beats the warrant all the way to $45.

 

C:\Users\Admin>cscript bac.js 1.1 1.5

Microsoft ® Windows Script Host Version 5.7

Copyright © Microsoft Corporation. All rights reserved.

 

 

INITIAL STOCK LEVERAGE: 1.5

 

 

MAINTENANCE STOCK LEVERAGE: 1.1

 

BAC: $7  STOCK_LEVERAGE: 1.447 STOCK_RETURN: 1.12 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $8  STOCK_LEVERAGE: 1.371 STOCK_RETURN: 1.35 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $9  STOCK_LEVERAGE: 1.316 STOCK_RETURN: 1.58 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $10  STOCK_LEVERAGE: 1.276 STOCK_RETURN: 1.81 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $11  STOCK_LEVERAGE: 1.245 STOCK_RETURN: 2.04 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $12  STOCK_LEVERAGE: 1.220 STOCK_RETURN: 2.27 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $13  STOCK_LEVERAGE: 1.200 STOCK_RETURN: 2.50 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00

BAC: $14  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 2.74 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22

BAC: $15  STOCK_LEVERAGE: 1.169 STOCK_RETURN: 2.97 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54

BAC: $16  STOCK_LEVERAGE: 1.156 STOCK_RETURN: 3.20 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86

BAC: $17  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 3.43 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18

BAC: $18  STOCK_LEVERAGE: 1.137 STOCK_RETURN: 3.66 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50

BAC: $19  STOCK_LEVERAGE: 1.128 STOCK_RETURN: 3.89 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82

BAC: $20  STOCK_LEVERAGE: 1.121 STOCK_RETURN: 4.12 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13

BAC: $21  STOCK_LEVERAGE: 1.115 STOCK_RETURN: 4.35 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45

BAC: $22  STOCK_LEVERAGE: 1.109 STOCK_RETURN: 4.58 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77

BAC: $23  STOCK_LEVERAGE: 1.104 STOCK_RETURN: 4.82 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09

BAC: $24  STOCK_LEVERAGE: 1.099 STOCK_RETURN: 5.05 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41

BAC: $25  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.28 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73

BAC: $26  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.51 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04

BAC: $27  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.74 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36

BAC: $28  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.98 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68

BAC: $29  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.21 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00

BAC: $30  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.45 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32

BAC: $31  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.69 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64

BAC: $32  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.92 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96

BAC: $33  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.16 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27

BAC: $34  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.40 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59

BAC: $35  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.64 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91

BAC: $36  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.88 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23

BAC: $37  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.12 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55

BAC: $38  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.36 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87

BAC: $39  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.60 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18

BAC: $40  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.85 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50

BAC: $41  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.09 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82

BAC: $42  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.33 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14

BAC: $43  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.58 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46

BAC: $44  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.82 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78

BAC: $45  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 10.07 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10