DraftKings Calls Stock Warrant for Redemption, and Warrant Holders Rejoice
Much to the surprise of many warrant holders, DraftKings (DKNG) announced they were redeeming their publicly traded warrants earlier today.
Doubtless many holders of the 5 year warrant were thinking, “Wait a minute, these are 5 year warrants…what the…???”
Unfortunately, like most SPACs (special purpose acquisition companies) that go public today, there was a redemption clause in the warrant offering.
The standard clause is that if the stock trades over $18 for 20 of 30 trading days, then the company can call the warrants. And, it’s not a bad deal for original warrant holders.
Most likely they bought the warrants in the $1-$4 range, and now they are getting out at a minimum of $6.50 (the warrant exercise price of $11.50, the standard right now, and the difference between that and $18). And for some, like holders of DraftKings warrants, it’s a LOT more.
So, if you are a DraftKings warrant holder…now what?
What to do with DraftKings warrants
You have a couple of options before the warrants expire on June 26th. The first rule is you must DO SOMETHING with the warrants.
Unlike options, the in-the-money warrants will not be exercised by your broker. If you do nothing, on once the warrants expire on the 26th, they WILL be worth nothing (or $.01).
I recently had a reader tell me they did nothing with their Virgin Galactic warrants before they expired, and now, well, they’re worth, yeah, nothing. Oops. Please do not email at the beginning of July that you forgot about your warrants in DraftKings.
So, you can either sell, or exercise the warrants. I rarely exercise warrants these days in a warrant expiration. There is usually a little bit of premium in the warrants (though these are so deep in the money, that’s generally not the case). And, just like an option you don’t want to exercise you want to sell the premium.
Plus, if you exercise you don’t control the stock for a few days while the exercise goes through. This would not have mattered for DraftKings recently, as the stock has been on a steady march higher. And, you probably made more money by exercising and not being able to sell your shares.
If you want to remain in the stock, you can always sell your warrants and turn around and buy the common stock. I’m sure there are tax implications involved, but I don’t even play a tax accountant on TV, so you’re own your own there.
All and all, for DraftKings warrant holders, this warrant call is not a bad problem to have. And, since DraftKings is not doing a cashless exercise, the redemption helps the company as well as warrant holders.
And, most importantly, the warrant call leads to another VERY profitable trade in DraftKings as the warrants expire…and that one we’ll be doing here: