Using Options and Warrants in Volatile Markets


The Warrant Report
August 15, 2011

Using Options and Warrants in Volatile Markets

In this issue:

  • Using Options and Warrants in Volatile Markets

In these volatile markets, investors should be aware of some of the advantages of using options, but even more so, long-term warrants in their investment planning. With the markets up one day down the next and the future somewhat uncertain perhaps a slightly different approach might be necessary.

The use of options, warrants and even LEAPS would greatly limit your initial cash outlay of your investment dollars.

Thus, you can control a share position in a company with much less money but still process the potential for great gains.

This is what we would call a “win-win situation”.

If you are a current subscriber, you should already know this, but it is always good to hear it again.

Basic Definitions

A call option gives the holder the right but not the obligation to buy the underlying common shares at a specific price and expiring on a specific date. Options will have a predetermined life of no more than 12 months and would normally be traded on the Chicago Board Option Exchange (CBOE).

A LEAP has the same definition but could start out with a predetermined life of up to 2 years and again would trade on the CBOE.

Warrants, while somewhat similar, have some different features. Warrants are issued by the company (not written by an investor) in connection with a stock offering or financial arrangement and can have a life of even 5 years or more.

The basic definition is the same, being that, a warrant gives the holder the right, but not the obligation, to acquire the underlying security at a specific price and expiring on a specific date in the future. The length of the warrant, whether 2 years, 3 years, 5 years, etc. is determined by the company and is part of the negotiating process in the issuance of the common shares along with the predetermined exercise price. 

Investors should be especially intrigued with those companies that have long-term warrants trading with a remaining life of over 2 years. The more time the better to give the company time to execute on their business plan and time for the markets to move up.

Think about it.  A warrant, a long term call if you will, on a company that you like that greatly limits your cash outlay while offering you the potential for great gains. The leverage is the key to warrants, a greater gain on your investment dollars. 

If you need more information you can visit our Learning Center.

We saw this interesting quote recently:

….” if we are all in the parade who is going to watch us walk by”

Think about this the next time you try and convince a friend or family member to invest in resource shares or warrants. Most just don’t get it, at least, not yet.

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    Dudley

Dudley Pierce Baker – Owner/Editor – Guadalajara/Ajijic, Mexico
Bruce Ross – Webmaster and Administrative Assistant – Phoenix, USA

Jeff Baker – Assistant Editor and Administrative Assistant, El Paso, USA

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