BAC leverage

[ERICOPOLY]

Glad to hear it  :)

 

Damn my avatar looks good... I might have to post less.

[rohitc99]

 

Needless to say I am a believer, I think this is the first time in my life that I have been "paid" to learn.

 

Thanks again

 

+1

[zippy1]

Eric,

 

      I also need to thank you for teaching me this.  :)

 

      Sincerely yours,

 

      Zippy

[Hielko]

Eric,

 

First off thanks for your posts on this subject - it has been very educational and profitable for me.

Back in March when this subject was talked about a lot I read every post over and over trying to figure out what you were trying to tell us.  I finally said wtf, the only way to really figure it out was to put a trade on.  The following is a summary of my actions:

 

Sold my 10,000 BAC A warrants at an average price of $5.81  - total proceeds $58,100 (March 20-25th 2013)

Purchased 100 Jan 2015 Calls, strike of $12 at average price of 2.40 - total cost $24,100 (march 25, 2013)

Purchased additional Calls to increase my exposure to BAC by 50%:

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.33 - total cost $5,800 (march 26, 2013)

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.02 - total cost $5,100 (April 5, 2013)

 

So I increase my exposure to BAC by 50%, however have approx. $23,000 less exposed

 

Today the A warrants closed at $6.30, so I would have made approx. $5,000 or 8.6% over the past 6 months if I had done nothing.

The Jan 2015 Calls closed today $3.20, so I am up about $13,000 or 37.5%!!

 

Needless to say I am a believer, I think this is the first time in my life that I have been "paid" to learn.

 

Thanks again

Maybe the market will teach you one day what path dependency means. Unfortunately that could be an expensive lesson... You didn't just increase exposure, and reduced risk: you also changed the time frame of your bet. Instead of being right by 2019 you need to be right by 2015. That's a huge difference, and that's why there is a pricing difference!

 

Any idea what would happen if BAC is @ 12.00 on Jan 2015? It could be pretty expensive to roll over your options for Jan 2017 ones (because now this strike would be at the money) and also depending on things like div yield and implied volatility. Now you would have less exposure than with your initial warrants investment while spending an equal amount of money and  you still have a maturity before that of the warrants.

[ERICOPOLY]

Eric,

 

First off thanks for your posts on this subject - it has been very educational and profitable for me.

Back in March when this subject was talked about a lot I read every post over and over trying to figure out what you were trying to tell us.  I finally said wtf, the only way to really figure it out was to put a trade on.  The following is a summary of my actions:

 

Sold my 10,000 BAC A warrants at an average price of $5.81  - total proceeds $58,100 (March 20-25th 2013)

Purchased 100 Jan 2015 Calls, strike of $12 at average price of 2.40 - total cost $24,100 (march 25, 2013)

Purchased additional Calls to increase my exposure to BAC by 50%:

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.33 - total cost $5,800 (march 26, 2013)

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.02 - total cost $5,100 (April 5, 2013)

 

So I increase my exposure to BAC by 50%, however have approx. $23,000 less exposed

 

Today the A warrants closed at $6.30, so I would have made approx. $5,000 or 8.6% over the past 6 months if I had done nothing.

The Jan 2015 Calls closed today $3.20, so I am up about $13,000 or 37.5%!!

 

Needless to say I am a believer, I think this is the first time in my life that I have been "paid" to learn.

 

Thanks again

Maybe the market will teach you one day what path dependency means. Unfortunately that could be an expensive lesson... You didn't just increase exposure, and reduced risk: you also changed the time frame of your bet. Instead of being right by 2019 you need to be right by 2015. That's a huge difference, and that's why there is a pricing difference!

 

Any idea what would happen if BAC is @ 12.00 on Jan 2015? It could be pretty expensive to roll over your options for Jan 2017 ones (because now this strike would be at the money) and also depending on things like div yield and implied volatility. Now you would have less exposure than with your initial warrants investment while spending an equal amount of money and  you still have a maturity before that of the warrants.

 

This is why the warrants didn't make sense at a 13% cost of leverage.  They should have been much cheaper annualized than the LEAPS, but they weren't.  That should have been your tip-off.  Go look at any options -- they are always cheaper annualized for the longer dated ones.  These warrants were the exception.

 

In other words, the odds were better to go with the LEAPS when considering all of the outcomes.  For one thing, the leverage was less than 13% annualized cost getting us to 2015 expiry.  Potentially the cost goes higher when rolling to the 2016s.... but...  as recent history has now shown the warrants could cost you a full 30% in just 6 months! 

 

That was the danger of prepaying for all those years of leverage as such extremely expensive rates.  A move upwards in the stock makes the 13.30 strike premiums decay rapidly due to skewness.  So the warrant holder really does best versus the LEAPS if the stock never rises.  But then, why bother with the stock if you don't expect it to rise?

 

[bennycx]

Prob the best way to think about this is.. u might think rolling short term debt is cheaper than fixing long term fixed rates so why are long term fixed rates always higher than short term fixed ones?

[ERICOPOLY]

Prob the best way to think about this is.. u might think rolling short term debt is cheaper than fixing long term fixed rates so why are long term fixed rates always higher than short term fixed ones?

 

Not so with options.  The shorter duration rates are always higher rates than the longer term rates.

 

There are two components to pricing -- volatility and time value.  Volatility is the more expensive of the two.  That's why the shorter term options are always the more expensive -- all volatility and little time value.

 

The trouble with how the warrants were priced is that they seemed to either have an enormous volatility premium (far in excess of that embedded in the LEAPS) or enormous annualized time value (far in excess of that embedded in the LEAPS).

 

 

Besides, the yield curve was extremely flat back in March.  How much higher were 3 year rates versus 1 year?  How much higher were 5 year rates versus 3 year?  It is a good thing to think about, but not applicable in the case of these warrants -- interest rates couldn't explain it.

[kevin4u2]

Eric,

 

These warrants are not the same as options.  You keep mentioning that the strike is $13.30 and that is correct today but is not necessarily true at expiry.  I estimate that the strike price will be around $10 and each warrant will equal 1.2 shares at expiry.  That changes things.

 

Now Heilko's statement is still valid.  If the common were to drop to $10 in 2014, options holders would be in for a world of hurt.  Getting the direction right in the short term is very difficult. 

 

[ERICOPOLY]

Eric,

 

These warrants are not the same as options.  You keep mentioning that the strike is $13.30 and that is correct today but is not necessarily true at expiry.  I estimate that the strike price will be around $10 and each warrant will equal 1.2 shares at expiry.  That changes things.

 

It doesn't change a thing.

 

Buy extra common with margin leverage and hedge the extra common with puts-- use margin for the leverage in a "portfolio margin" account.  Take each dividend and reinvest it in the stock -- just enroll the common in a DRIP if you must so that it's automated as with the warrants.

 

Roll the put every 12 months until January 2019.

 

There, you have exactly the same dynamics as with the warrant, except you don't lose 4 cents per year worth of dividend as you do with the warrants.  Think again about this -- the warrant adjustments are merely there to simulate a DRIP feature.  You get credit for the dividend as well as increased shares (to simulate reinvestment of the dividend into the stock).

 

The difference between the two is solely the cost of leverage.

 

The risks however are different.  You can lock in you interest rate at an average annualized 13% rate back in March if you go with the warrants, but if the stock shoots up it could wind up costing you 30% in just 6 months.  It could have been far worse -- if the stock were at $18 or $20 already the cost from the warrants decaying would have been far more extreme.  Could have cost you 50%.

 

Weight that risk of 30% - 50% possible cost over a 6 month period against say, the risk of having to roll the 2015 options to 2016 options at an annualized cost in excess of the 13% cost that you can lock in with the warrants.  Oh boy, maybe for a year you wind up paying an extra couple of percent.  Maybe 5% or 7% too much.  Versus say taking a 30% to 50% hit?  The risk profiles simply don't compare.

 

And in the first place, the period from March 2013 to January 2015 had an annualized cost of leverage of less than 11% at current margin rates.  There was room for a 2% rate rise in there.  Plus, that would be the rate if the put were rode down to zero.  it would likely cost less in actual fact if the 2015's were rolled into 2016s (so that you lose time value decay, and don't suffer the volatility decay).

[ERICOPOLY]

Now Heilko's statement is still valid.  If the common were to drop to $10 in 2014, options holders would be in for a world of hurt.  Getting the direction right in the short term is very difficult.

 

His comment isn't necessarily valid if you were long equivalent number of shares (which is what the thread has been about since the beginning).  Like if you had 2x leverage in warrants vs 2x leverage in common (with puts to hedge the portfolio margin).

 

The only way it would be in a "world of hurt" is if the leverage cost in the LEAPS were to jump substantially higher than 13% annualized.  Keeping in mind that the LEAPS only cost 11% annualized to begin with, and probably less if rolled to 2016s instead of held till expiry.

 

Instead, the warrant holders are the ones in the world of hurt, as their cost of leverage over the first six months jumped to 30%.

 

I mean, think about that.  30%!  And this is exactly the risk that I outlined back in March -- a big move up could put a massive drag on the warrants due to skewness, so there should be no reason to take on that risk.

 

[Straddle]

Eric,

 

First off thanks for your posts on this subject - it has been very educational and profitable for me.

Back in March when this subject was talked about a lot I read every post over and over trying to figure out what you were trying to tell us.  I finally said wtf, the only way to really figure it out was to put a trade on.  The following is a summary of my actions:

 

Sold my 10,000 BAC A warrants at an average price of $5.81  - total proceeds $58,100 (March 20-25th 2013)

Purchased 100 Jan 2015 Calls, strike of $12 at average price of 2.40 - total cost $24,100 (march 25, 2013)

Purchased additional Calls to increase my exposure to BAC by 50%:

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.33 - total cost $5,800 (march 26, 2013)

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.02 - total cost $5,100 (April 5, 2013)

 

So I increase my exposure to BAC by 50%, however have approx. $23,000 less exposed

 

Today the A warrants closed at $6.30, so I would have made approx. $5,000 or 8.6% over the past 6 months if I had done nothing.

The Jan 2015 Calls closed today $3.20, so I am up about $13,000 or 37.5%!!

 

Needless to say I am a believer, I think this is the first time in my life that I have been "paid" to learn.

 

You haven't been paid to learn, you've been paid because you took on more leverage. The shorter the expiration date of the options the more leverage you'll get. This works in 2 directions obviously.

[ERICOPOLY]

Eric,

 

First off thanks for your posts on this subject - it has been very educational and profitable for me.

Back in March when this subject was talked about a lot I read every post over and over trying to figure out what you were trying to tell us.  I finally said wtf, the only way to really figure it out was to put a trade on.  The following is a summary of my actions:

 

Sold my 10,000 BAC A warrants at an average price of $5.81  - total proceeds $58,100 (March 20-25th 2013)

Purchased 100 Jan 2015 Calls, strike of $12 at average price of 2.40 - total cost $24,100 (march 25, 2013)

Purchased additional Calls to increase my exposure to BAC by 50%:

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.33 - total cost $5,800 (march 26, 2013)

Purchased 25 Jan 2015 Calls, strike of $12 at average price of 2.02 - total cost $5,100 (April 5, 2013)

 

So I increase my exposure to BAC by 50%, however have approx. $23,000 less exposed

 

Today the A warrants closed at $6.30, so I would have made approx. $5,000 or 8.6% over the past 6 months if I had done nothing.

The Jan 2015 Calls closed today $3.20, so I am up about $13,000 or 37.5%!!

 

Needless to say I am a believer, I think this is the first time in my life that I have been "paid" to learn.

 

You haven't been paid to learn, you've been paid because you took on more leverage. The shorter the expiration date of the options the more leverage you'll get. This works in 2 directions obviously.

 

Sort of.  Getting out of the warrants before they seriously underperformed the common was the first smart move.  Getting into something that had a lower cost of leverage than the move in the common was the second smart move.  Increasing the total notional exposure was the part you are objecting to -- and I agree, that part was just lucky.

 

The leverage in the LEAPS actually beat the common because the leverage was cheaper (the % move in the common exceeded the cost of leverage).

 

The leverage in the warrants did not beat the common -- because the leverage cost in the warrants turned out to be 30% and the stock appreciated by less than 30%.

 

[ERICOPOLY]

This thread has been good for me.  The more times I have to explain it, the clearer my thinking about it becomes.

 

Now, I've been able to reduce it to simple explanations such as how the warrants are just a synthesized dividend reinvestment plan, with leverage.

 

One day the TARP warrants will have all expired, but then those of you who held onto them until expiry (in portfolio margin accounts) can just extend the life of the warrants in perpetuity by utilizing puts once you have the underlying common shares in your accounts.  You can even move up the strikes, something which I'm sure you would have been longing for by the time these things mature.  Plus, you'll no longer have that 4 cent annual dividend drag.

 

 

[kevin4u2]

Sorry I'm late to the party.  Doesn't a $10 strike vs a $13.30 strike change the cost of leverage?

 

 

The difference between the two is solely the cost of leverage.

 

[racemize]

Sorry I'm late to the party.  Doesn't a $10 strike vs a $13.30 strike change the cost of leverage?

 

 

The difference between the two is solely the cost of leverage.

 

 

His point is that the change in strike price is simply a warrant mechanism that is equivalent to using dividends and repurchasing stock.  Thus, if you count the change in strike price, you also need to consider the extra dividends gotten if you had margined and bought puts, and used the dividends to repurchase shares.  So, in that case, you can simply ignore the strike price adjustment, as you would have an equivalent number of dividends/repurchased shares in the other strategy.

 

It is a bit harder when comparing the call option strategy (rather than margin + puts), since the calls don't receive dividends, and thus have no similar mechanism.  I always just count the missed dividends as part of the "cost of leverage" (which is minimal for the BAC calls right now, since it is only 4 cents a year).  If you get the dividends right (since they will change over time), these can also be compared, ignoring the strike price adjustment of the warrants.

[ERICOPOLY]

Sorry I'm late to the party.  Doesn't a $10 strike vs a $13.30 strike change the cost of leverage?

 

 

The difference between the two is solely the cost of leverage.

 

 

His point is that the change in strike price is simply a warrant mechanism that is equivalent to using dividends and repurchasing stock.  Thus, if you count the change in strike price, you also need to consider the extra dividends gotten if you had margined and bought puts, and used the dividends to repurchase shares.  So, in that case, you can simply ignore the strike price adjustment, as you would have an equivalent number of dividends/repurchased shares in the other strategy.

 

I believe that's right.

[damianolive]

Great discussion, thanks to all involved.

 

Question: what happens to both alternatives (warrants and calls+stock on margin+puts) if interest rates spike? For instance, how would that affect the cost of margin and the roll over of the options?

[ERICOPOLY]

Great discussion, thanks to all involved.

 

Question: what happens to both alternatives (warrants and calls+stock on margin+puts) if interest rates spike? For instance, how would that affect the cost of margin and the roll over of the options?

 

That's the wild card.

 

Initially we started this discussion with a 13% average annualized cost for the leverage in the warrants.  And it was 11% for the leveraged common with puts approach.

 

So there was room for a 2% rise in rates before hitting a 13% cost.  Now that the stock has risen, the cost of rolling those $12 strike puts has dropped.  Should the stock rise further, it will drop even more.

 

The puts alone for the $7 strike cost less than 2% annualized.... and I believe that too will happen to the $12 puts in a year or two when the stock is at $20 -- so can you imagine 11% margin interest rates when they are presently only about 0.5% at IB (for large loans)?

 

That is certainly a consideration with rolling puts along and paying margin rates -- but on the other hand you don't take the risk of getting hit over the head by a sudden 30% or 50% negative cost of leverage adjustment over just a six month period.  That was the black swan that people chose to ignore when they thought the warrants were less risky.  (to them it was a black swan, to others it was entirely foreseeable).

 

 

[ourkid8]

Sorry, I really do not understand options and a bit lost.  I currently hold 10,000 BAC A Warrants and 5,000 Common stock.  If the stock was to move in the next 2 years to $20-25/share the options would provide greater upside then the BAC A warrants because of the lower cost of leverage, correct?  Would it make sense in swapping some BAC A warrants for Jan 2015 Calls which is priced at $3.20 as in the short term provides lower cost of leverage and thus potentially a greater return if it reaches $20-25 by Jan 2015? 

 

I understand Eric's concern with holding a leveraged position in BAC once it is over book value as in theory you want to reduce risk at that point. 

 

Tks,

S 

[ERICOPOLY]

Sorry, I really do not understand options and a bit lost.  I currently hold 10,000 BAC A Warrants and 5,000 Common stock.  If the stock was to move in the next 2 years to $20-25/share the options would provide greater upside then the BAC A warrants because of the lower cost of leverage, correct?  Would it make sense in swapping some BAC A warrants for Jan 2015 Calls which is priced at $3.20 as in the short term provides lower cost of leverage and thus potentially a greater return if it reaches $20-25 by Jan 2015? 

 

I understand Eric's concern with holding a leveraged position in BAC once it is over book value as in theory you want to reduce risk at that point. 

 

Tks,

S

 

Here is my take on the $15 strike 2015.

 

Scenario:

You own common and warrants today.  Sell the warrants and for every warrant you sell, buy a share of common to replace it with.  Then look at your total amount of money borrowed (using portfolio margin), and purchase enough $15 strike puts to fully hedge the margin loan.  There won't be margin calls if the stock plunges -- it's portfolio margin, not Reg-T margin.  You effectively have a synthetic call (which I find funny to think about because calls are themselves synthetic).

 

The puts cost you 12% annualized if you ride them into the ground.  Most likely the cost will be lower when you roll them annually (the first roll will be in just a month or two when the 2016s first become available).  Depending on the size of your margin loan, the interest rates will cost you 0.5% to maybe 1.2% at Interactive Brokers.  Sometimes when you roll, you might want to overlap your put holding period by a month so that you can sell the older ones for a short-term capital loss (avoid wash sale rules). 

 

The advantage to rolling puts along instead of rolling calls along is taxes (write off the puts and margin interest), and certainty that you will collect the dividends from the common no matter what.  Whereas with the calls it all just gets added (embedded interest and puts) to the cost basis of the shares when you take delivery.

 

Note that the cost of this leverage is now higher than that embedded in the $13.30 strike warrants, but keep in mind that the strike price is higher too (it's $15, not $13.30).

 

But I think if you just count the delta between the cost of the 2015s and the 2016s as your annual cost of leverage, then it will probably cost no more than the warrants currently cost.  And then of course when the stock rises to $20 you won't suffer the cost-of-leverage devaluation that the warrant holders will experience.  Or at least, it will be capped at a 12% annualized cost.

 

The movement from here to $20 and $25 is where you want to hit the ball.  After that, it will be time to go home and play another sport.  You don't want to miss out on that movement by riding with the warrants -- as warrant holders experienced over the past 6 months.

 

Then if it's at $20 and the bank is looking really good and you think the market might give it a higher multiple (like to a $30 stock price), then you can just roll to more puts.  They should be extremely cheap by then.  Probably 2% annualized which is where the $7 strike puts trade today.

 

The thing about the cost of leverage embedded in options is that it is most expensive when the stock is near the strike price on the option.  As the stock moves away from that price (higher or lower), the cost of leverage plunges at a much faster rate than the stock price.  There are few exceptions to this -- there were times in the financial crisis when cost of leverage went really high, for example.  But that always happened at distressed prices.  So if BAC were to drop to $7 per share again, the annual cost of leverage for the $7 strikes would likely go above 20% again, but the annual cost of leverage for the $12 strike would actually plunge from the levels (due to skewness).  So really there isn't as much to fear in this regard as what people commonly believe.

[ERICOPOLY]

Presently, there is only a 99 cent difference between the 2014 and 2015 $15 strike puts.

 

The extra year of leverage costs only 7%.

 

I note that 7% plus 50 bps - 120 bps margin interest is cheaper than the annualized 9% rate that's currently in the warrants.

 

And lower risk too, it's a higher strike put!

 

Cheaper and less risk.

 

We'll see if when the 2016s come out the extra year (beyond 2015) is priced at similar rate of only 7% annualized.

[racemize]

Sorry I'm late to the party.  Doesn't a $10 strike vs a $13.30 strike change the cost of leverage?

 

 

The difference between the two is solely the cost of leverage.

 

 

His point is that the change in strike price is simply a warrant mechanism that is equivalent to using dividends and repurchasing stock.  Thus, if you count the change in strike price, you also need to consider the extra dividends gotten if you had margined and bought puts, and used the dividends to repurchase shares.  So, in that case, you can simply ignore the strike price adjustment, as you would have an equivalent number of dividends/repurchased shares in the other strategy.

 

I believe that's right.

 

I got a PM on this answer, and after toying with it for a while, here's some math to illustrate the point:

 

Let's take this to an extreme.  Let's assume you had a common share that you purchased for $10 versus the warrant having a strike of $10, and a special dividend is paid of $9.  Presumably the common would drop to $1, if the price was efficient, as it just lost 9$ of equity.

 

Common case:

nothing really changes here, as before it was 1 share at $10 and now it is 10 shares at $1 (since you used the $9 to buy 9 more $1 shares).  You still have $10 of stock.

 

warrant holder:

new strike = $10 * (10-9) / 10 = $1 (per share)

shares per warrant = 10/1 = 10

so, again, before we could get one $10 share, and now we can get 10 $1 shares

 

Note that the strike price is in "per share" units (at least according to my understanding).  So while, the shares per warrant is now 10, you will have to pay $10 (since it is $1 per share) and not $1 to get the 10 shares.  Saying it another way, the warrant gives you rights to purchasing the 10 shares, but at a price of $1 per share.  As a result, you are in the same situation before and after the dividend, with both the common and the warrant.  Thus, the adjustment to the warrant (both strike and shares) is simply the same as the math for the dividend and repurchase with the common.

 

I'm fairly sure this "per share" unit on the strike price is what is so confusing.  I struggled with this issue on the C warrants for a long time, because the 10:1 split affected both the strike price (increasing it by 10x) and the shares per warrant (decreasing by 10x).  If the units are not "per share" (which is also stated in the SEC filings, e.g., BAC A warrants states "at an exercise price of $13.30 per share"), then the adjustment makes absolutely no sense for them.  I think it would have been simpler to state them without the "per share" units, but here we are. 

 

If someone has interpreted these differently, then please correct me.  Or perhaps everyone already figured that out or knew it, and I was just being dense for a while.

[yitech]

I'm fairly sure this "per share" unit on the strike price is what is so confusing.  I struggled with this issue on the C warrants for a long time, because the 10:1 split affected both the strike price (increasing it by 10x) and the shares per warrant (decreasing by 10x). 

 

The 10:1 reverse-split makes a $5 C stock $50, so the original $10.61 strike would become $106.1. Just like any options or LEAPs in similar situations, total warrant shares outstanding would be reduced by a factor of 10 as they should be. You are essentially merging every 10 pieces of equal-sized pies to one big piece. The rest would be adjusted accordingly.

[Rabbitisrich]

 

 

Here is my take on the $15 strike 2015.

 

Scenario:

You own common and warrants today.  Sell the warrants and for every warrant you sell, buy a share of common to replace it with.  Then look at your total amount of money borrowed (using portfolio margin), and purchase enough $15 strike puts to fully hedge the margin loan.  There won't be margin calls if the stock plunges -- it's portfolio margin, not Reg-T margin.  You effectively have a synthetic call (which I find funny to think about because calls are themselves synthetic).

 

The puts cost you 12% annualized if you ride them into the ground.  Most likely the cost will be lower when you roll them annually (the first roll will be in just a month or two when the 2016s first become available).  Depending on the size of your margin loan, the interest rates will cost you 0.5% to maybe 1.2% at Interactive Brokers.  Sometimes when you roll, you might want to overlap your put holding period by a month so that you can sell the older ones for a short-term capital loss (avoid wash sale rules). 

 

 

Note that the cost of this leverage is now higher than that embedded in the $13.30 strike warrants, but keep in mind that the strike price is higher too (it's $15, not $13.30).

 

But I think if you just count the delta between the cost of the 2015s and the 2016s as your annual cost of leverage, then it will probably cost no more than the warrants currently cost.  And then of course when the stock rises to $20 you won't suffer the cost-of-leverage devaluation that the warrant holders will experience.  Or at least, it will be capped at a 12% annualized cost.

 

 

I'm not yet up to date on this thread discussion, but it seems like you are using two definitions of cost of leverage. In the case of the puts + margin rate, the cost of leverage is the hurdle rate to make money. From your early thread posts, warrant cost of leverage refers to the hurdle rate to beat the common.

 

[racemize]

I'm fairly sure this "per share" unit on the strike price is what is so confusing.  I struggled with this issue on the C warrants for a long time, because the 10:1 split affected both the strike price (increasing it by 10x) and the shares per warrant (decreasing by 10x). 

 

The 10:1 reverse-split makes a $5 C stock $50, so the original $10.61 strike would become $106.1. Just like any options or LEAPs in similar situations, total warrant shares outstanding would be reduced by a factor of 10 as they should be. You are essentially merging every 10 pieces of equal-sized pies to one big piece. The rest would be adjusted accordingly.

 

Yes, of course, that was why I was annoyed with the math not working out without the "per share" caveat. 

 

Here's the before and after May 9, at the split:

Before:

common: 4.55

warrants: 0.7

shares per warrant: 1

exercise price: 10.61

 

After:

common: 45.5

warrants: 0.7

share per warrant: 0.1

exercise price: 106.1

 

If you don't consider the exercise price "per share", then you end up with:

Before:

Break-even is $11.31

 

After:

You spend $106.1, and get 0.1 shares, which means your break even price wouldn't be until common > $1k.

 

Clearly, the break-evens are not the same in that situation, but they have to be for it to be equivalent.  If you change the exercise to "per share", then:

You could exercise 0.1 shares, with an exercise price of $106.1 per share, which is $10.61 per 0.1 shares, so the break even is $11.31 per 0.1 share, the same as before.

 

 

Again, I was perhaps just ignorant and everyone knew this, but it does impact the small adjustments to.  Let's say we do get to the BAC warrants having a strike of $10 and 1.2 shares per warrant.  Using the above, that means we do not get to spend $10 and get 1.2 shares, instead, we will be spending $12 to get the 1.2 shares.