Market Place | The Nature Of Warrants

NYTimes
Editors Note from Dudley Pierce Baker, Founder-Editor of http://CommonStockWarrants.com

“This is an incredible article written in 1983 which shows the opportunities and potential wealth which can be created by investing in long-term warrants.”

THE Chrysler Corporation’s common stock was a huge winner on the New York Stock Exchange last year, starting out just above $3 a share and climbing above $18. But, percentagewise, Chrysler’s warrants did even better, jumping from a low of 1 1/8 to a high of 10 1/2.

Thus, the old-fashioned warrant, after being upstaged in recent years by explosive trading in listed call options, showed it has some life left -for the right issue at the right price.

Basically, a warrant gives its holder the right to purchase a stock at a set price during a specified time period. In this respect, it is similar to a call option.

”But the key difference is the time factor,” said Eli Tanenbaum, an analyst with Lipper Analytical Distributors Inc. ”Whereas a warrant is essentially a long-term option to buy, a call option has a maximum life of nine months. Some warrants, in fact, are perpetual, while many have a life span of several years.”

There are other differences as well. Warrants often possess individually tailored terms, and these may be subject to change by the issuing company. Any prospective buyer of warrants should always take care to check the terms and, later, to keep current with any changes.

As for variety, call options are traded in almost 400 stocks, including virtually all of the more prominent equities. There are far fewer warrants linked to big-name stocks.

Warrants do exist, however, for a number of major companies, including American Express, Greyhound, B.F. Goodrich, Resorts International, Warner Communications, the Atlas Corporation, the Alleghany Corporation and various airline holding companies.

In contrast to call options, warrants are often issued as a ”sweetener” in conjunction with the new debt obligation of a company. In the late 1960’s, conglomerates sometimes used warrants as part of financing packages.

The Value Line Investment Survey has pointed out that warrants, by their very nature, are ”high-risk instruments” that typically show greater volatility than their associated stocks.

Anyone doubting the risk factor need only examine the plunging prices for warrants of Warner Communications and Mattel Inc. when both stocks tumbled in December in response to negative news developments.

If a stock drops sharply in price, its warrant frequently displays an even steeper percentage decline. Moreover, warrants do not pay dividends.

On a happier note, a weekly Value Line publication called Options and Convertibles had the foresight to recommend purchase of the Chrsyler warrants last Aug. 2 when they were selling at 2 3/4. ”Since November,” said Michael H. Schwartz, the editor, ”we’ve rated these warrants as a ‘hold,’ meaning that it’s all right for people to maintain existing positions.”

The Chrysler warrants are due to expire on June 15, 1985. Mr. Schwartz said that the auto maker, meanwhile, reserves the right to accelerate the expiration date to as early as July 1, 1983, if the price of Chrysler’s common stock is at least 150 percent of the exercise price of 13 – or, in effect, 19 1/2 – for 60 consecutive trading days.

The exercise price represents a call on the stock during the specified period in the sense that one warrant, along with $13 in cash, may be exchanged for one share of Chrysler common.

Warrants spell leverage as well as risk. For this reason, they often trade at a premium over their exercise value. This premium represents the effective cost of the leverage. Meanwhile, as a warrant’s expiration date approaches, the premium tends to shrink. A similar phenomenon, known as ”time value,” is true for call options.

A warrant, like a call option, tends to track the action of its associated stock. And, volatile as they are, warrants sometimes produce stupendous gains for the fortunate – and patient – owner.

During the Depression, warrants of the Tri-Continental Corporation, a closed-end investment company, sold at one thirty-second of a dollar. These warrants were so cheap that a publisher once toyed with the idea of using them as end papers for an investment book. Later, in 1969, the warrants traded as high as 75 3/4.

More recently, there was a spectacular gain in warrants of the Charter Company, which mainly operates energy-related businesses. During 1979, Charter warrants rose to 45 3/4 from 1 3/8. Then, as Charter’s fortunes tumbled, so did the warrants.

Mr. Tanenbaum of Lipper recalled a coup he made in 1978 in warrants of the General Development Corporation after the warrant life was extended for five years by City Investing, which controlled the land development company. ”I bought thousands of warrants for a nickel apiece when they were trading like water,” he said. ”I later sold them out at an average price of $2. It was a once-in-a-lifetime gift.”

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