How The Obstacle Becomes the Way, in Trading Warrants
As part of our “Christmas Haul” as the Instgrammers in my family call it, my son got a copy of Ryan Holiday’s The Obstacle is the Way.
I was first introduced to Mr. Holiday’s work when I read Trust Me I’m Lying earlier this year.
It’s a couple of years old, so some of the exact tactics may be out of date, but it details how as a media buyer Mr. Holiday seduced (lied, cheated, pick your dirty, underhanded verb) the media into reporting exactly what he wanted reported for the benefit of his clients.
If you happen to be drinking the media kool-aid from either side of the current political whatever is happening a few miles from me in downtown DC, well, then you won’t like the book.
Because, it points out how gullible the media is, and how this panders to the needs of the majority of Americans…thus the multi-billion dollar media industry.
From Media Buyer to Self Help Rock Star
But, in The Obstacle is the Way, Mr. Holiday does a wonderful job of storytelling his way through how you must overcome obstacles, in life, business, etc. to move forward. I won’t spoil the book for you, but highly recommend it as a short, motivating read to kick off 2020.
If you are a fan of Stoicism and Marcus Aurelius, and as a trader with almost 25 years of experience I don’t see how you’re not, or won’t become if you stick it out for very long in this trading game. Then, you’ll enjoy the book as a reinforcement of your trading process.
The title of the book actually comes from the Marcus Aurelius quote, “This impediment to action advances action. What stands in the way becomes the way.”
Learning the Warrant Ropes
So, with that context, I was super excited to read an email this morning from a “Warrant Observer” member, S.A. (great initials by the way) who had lost money in a warrant, but wanted to learn from the loss, and even encouraged me to write an email or blog post about it for others to understand why he lost money.
Marcus Aurelius would give S.A. a big hug if he were still kicking around! S.A. wrote:
I bought shares of a SPAC, RWGE (Regalwood Global Energy Ltd) on 5/13/2019. Like most SPACs, it was for warrants with a strike price of $11.50, good for five years from the acquisition. At the time, the underlying stock was at $10.33.
On Christmas Day, I got a cryptic message from ETrade saying some CUSIP number had expired. Didn’t pay any attention, it was Christmas Day after all! Turns out it was these Warrants. How can that happen without any warning? Is there some “expiration” date before which the acquisition date that I should be aware of? If no suitable acquisition candidate is found, can the person / company setting up the SPAC just take my money and run?
I would appreciate any explanation. Also, might make a nice article for your next newsletter, since I expect many of your subscribers are like me — I understand stocks and options well, but clearly not Warrants!
S.A. I feel your pain, and I’m sure other readers do as well. (I actually know they do as I get questions like this ALL the time.)
SPACs, Before and After Acquisition Announcement
When you own warrants of a SPAC (special purpose acquisition company) that has not yet announced an acquisition target, three things can happen.
From Good to Bad, they are:
1. The company announces an acquisition target,
2. The company does not find a target, and returns the invested money to common shareholders, and
3. The company announces “early” that it cannot find an acquisition, and returns the invested money to common shareholders.
But first, before looking at 1, 2, or 3, a quick sidebar.
If you own common stock in the SPAC, and 2 or 3 above happens, you simply get your money back.
Remember, a SPAC is like a big ‘ol piggy bank until it completes its acquisition. No acquisition and they break open the piggy bank and divide the money among the common stockholders.
If you are a warrant holder…completely different story. If 2 or 3 above happens, well, let’s just say you’re in the same boat I was in a few months after buying my first stock…oh yeah beautiful disc drive companies of yesteryear.
It went to zero. Yep, we ALL get to go through The Obstacle one way or another.
SPAC warrants are the sweetener in a SPAC offering. They’re the lottery ticket of SPACland. If you hit the number, that would be number 1 above, then you can easily double your money (or more).
But, if the company does not actually complete an acquisition, then the warrants become worthless. Not worth the digital paper they are virtually printed on.
So, in case number 1, where the company announces an acquisition target, there is a good chance the warrants double in price (because NOW they are likely worth something) and perhaps go even higher.
In case number 2, check the original prospectus (SEC filing, or from your broker) to find the exact terms. MOST SPACs have a 2 year shelf life. Meaning if they have not found an acquisition target in 2 years (it can be more or less, so you HAVE to read the terms for each one) then they give common shareholders their money back and the warrants become worthless.
Think of this scenario much like an expiring option. As you may know, the last 30-60 days of an option’s life that is out of the money sees a rapid decline in value, you know, the falling off the cliff curve. Same thing with a SPAC warrant.
Obviously, it depends on the specific SPAC, eg, background of management, industry, market conditions, etc. etc. and etc. as to how rapidly the SPAC warrant price declines as it nears the term limit.
Remember, and I believe this is what confused S.A., (and is a great opportunity for everyone to learn something) there is generally a five year expiration on the warrants AFTER an acquisition has taken place, but that is different than the general two year expiration BEFORE an acquisition. (Here is a link to info on Regalwood closing up shop.)
And, finally, in case number 3, that is when we find our true stoic selves and only punch 1, and not 2, walls. In 3 above, the company throws in the towel EVEN BEFORE the 2 year search period is over…and…you guessed it, the warrants become worthless.
Of course this management won’t be asked back to SPACland again by investors, but that’s no solace to anyone holding those warrants.
Warrants, and Options, and the Internet, Oh My
Two points, and then it’s off to champagne and ringing in 2020.
First, this is another reason warrants are NOT exactly like call options.
If you are never going to buy a warrant, and are doing an ivory tower academic article on warrants, sure, they are JUST LIKE CALL OPTIONS…until you become an actual trader putting your money at risk, and then they’re not. (Sorry, have read a few ne’er do wells on the internet expounding on their knowledge of warrants.)
Second, this is why I recommend holding SPAC warrants in a SPACfolio which I talk about, and provide a model of, to Warrant Observer members. Using a portfolio approach dampens risk, and still gives the opportunity to do very well holding these warrants. Just as our SPACfolio has done in 2019.
With that, S.A., thank you for the email question and for being willing to learn and share your learning with others! I commend you!!
And, to everyone, Happy New Year!! We are going to kill it in the 2020 warrant world if we do even half as well as we did in 2019. And my stoic, risk averse self does not believe that will be the case for one second.
Join us here as we knock down Obstacles.