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The Dirty Little Secrets of Warrants, Options & LEAPS

Commodities / Options & Warrants Nov 19, 2009 - 10:44 AM GMT

By: Dudley_Baker

Commodities

Best Financial Markets Analysis ArticleWith the gold bull market charging firmly ahead perhaps it is time to reflect upon what is actually happening from the perspective of the junior mining sector. 

The first chart below is of the TSX Venture Index showing a great uptrend and looking very strong. The second chart shows us the TSX Venture Index relative to Gold. Wow, what a difference.


In effect, the TSX Venture Index is actually putting in a miserable performance relative to the price of gold.

We are firm believers this trend will soon change and the TSX Venture Index will be leading the way higher with gold lagging.

The catalyst for this trend change is beyond our scope but we are confident it will happen and probably when we least expect it.

Investors new to precious metals as well as the more seasoned investors and professionals will be looking for ways to maximize their gains as the junior sector catches on fire and enters a mania phase before capitulating in a few years.

In addition to buying the common shares of your favor juniors, several other investment vehicles are available to investors which offer the opportunity to increase your leverage. Leverage in this sense is not a dirty word and should be considered by investors as an essential addition to your portfolio.

The Dirty Little Secret Boils Down To Time

A few favorites of investors are options, LEAPS, and warrants. All of these investment vehicles have appeal to investors and are very similar, except for issue of time. Options, will normally have anywhere from 30 days to 180 days of life, LEAPS can at times have 1 or 2 years of life and warrants can have a life of 5 years or more.

As we all know from the experience of last September – October, a meltdown in the markets can be disastrous to our portfolios. Holder of call options no doubt lost their entire investment, while many holders of LEAPS and warrants weathered this storm and their positions in some cases are now in the money.

You maybe familiar with options but perhaps not with LEAPS or warrants, so allow us a few minutes to brief you.

Options:
A call option is a contract that gives its owner the right, but not the obligation, to buy a specified number of shares at a predetermined price within a set period of time. Most call options have a life of 30, 60, 90 or 180 days. Call options place you in the position of being a trader looking for short term gains with high risk associated therewith. Investors have to be correct on the direction of the markets, your individual stock choice as well as the timing of your entry and exit strategy. This is not so easy to do for the average investor. Also, there are very few call options on stocks of mining companies and we are in a world where investors demand more and more choices.

There has been an incredible amount of information, education and marketing to get the investors attention for options in recent years. For those professionals who can manage risk and have a short term horizon this can be profitable and exciting. However, the industry statistics are that most investors, 80%-90% will lose their investment dollars.

LEAPS:
A leap which stands for Long Term Equity Anticipation Securities is also an option as defined above but these have a longer life of perhaps up to 2 years. Leaps will give you much more time but unfortunately there are very few leaps on the mining stocks.  

Options and leaps are actually created or written by investors who write an option and keep the premium (the amount you paid) as income. The underlying company receives nothing.

Warrants:
A warrant is a security giving the holder the right, but not the obligation to acquire the underlying security at a predetermined price and for a specified time. Sounds a lot like call options and leaps, right?  Well, yes and no. Warrants are actually issued by the underlying company, normally in connection with a financing arrangement and are sometimes called a “kicker” or “equity kicker”.  Most warrants will never trade but are held by mutual funds or other private investors whom have provided the financing.

There are however, many warrants that do trade freely on either the U.S. Exchanges or the Canadian Exchanges. These warrants trade similar to their underlying stocks and will fluctuate up and down with the price of the stocks and can be purchased through your brokerage firm.  

Warrants have a longer life than call options and most LEAPS which is why our subscribers are partial to them. Warrants are usually issued by the company for at least 2 years and sometimes up to 5 years. If an investor is more conservative and investment oriented as opposed to speculating, then warrants may make more sense. Timing seems to always be the issue doesn’t it?

History: Warrants actually originated back in the 1920’s according to some of my sources and in the 1950’s thru the 1970’s, there was a service by Sidney Fried, The RHM Warrant Survey. The service was only available in hard copy and was one of the few sources of information on warrants.

In “The Speculative Merits of Common Stock Warrants”, by Sidney Fried and written in 1949, he states:

"...Common stock warrants turn in the most spectacular performance of any group of securities....the speculative potentialities of common stock warrants are enormous....With potential profits and potential losses so great it is a source of wonder that so little understanding of the nature of common stock warrants exists not only among the investing 'public', who might be forgiven this sin, but even among the many 'professionals' of the business upon whom the 'public' depends for information and guidance."

Sidney Fried’s observation in 1949 is the same as today, in that, most investors and analysts do not take the time to understand the potential leverage which warrants can bring to your portfolio. For those readers interested in knowing more of the benefits of purchasing warrants we invite you to visit our website.

Whether your investment choice is either of the above, it is all about increasing your leverage. In layman’s language this means generating a greater gain than the anticipated gain on the common shares.

If you would like to know more about warrants, we encourage you to visit our website for an in-depth discussion of warrants, many examples, how to trade warrants and much more.

For those readers unfamiliar with our services:

  • PreciousMetalsWarrants.com provides an online database for all warrants trading on the natural resource companies in the United States and Canada.
  • InsidersInsights.com tracks the buying and selling of corporate insiders with a focus on the junior mining and natural resource sectors. Buy and Sell Alerts are issued as deemed relevant based upon our analysis.

We encourage all readers to sign up for our free weekly email.

Dudley Pierce Baker
Guadalajara/Ajijic, Mexico
Email: support@preciousmetalswarrants.com
Website: PreciousMetalsWarrants
Website: InsidersInsights

Dudley Pierce Baker is the owner and editor of Precious Metals Warrants and Insiders Insights. Articles are written by Dudley Baker along with contributing editors, Arnold Bock of Mendoza, Argentina and Lorimer Wilson of Toronto, Canada. PreciousMetalsWarrants provides an online subscription database for all warrants trading on junior mining and natural resource companies in the United States and Canada and a free weekly newsletter. InsidersInsights alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

Disclaimer/Disclosure Statement:PreciousMetalsWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. The opinions expressed herein are the express personal opinions of Dudley Baker. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.

Dudley Pierce Baker Archive

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