You know how you think something is one way and it turns out it’s completely different?

I’ve been re-reading Thinking, Fast and Slow. How easily people “believe” something when they have very little information fascinates me.

Before I went to Wall Street, to learn trading and warrant arbitrage, I thought market makers were probably aloof brats, and more likely than not, jerks. The Gordon Gekko type.

I was wrong.

They were some of the nicest people I’ve ever worked with as it turns out. Very down to earth. The older guys were family oriented, and the younger guys were extremely nice and fun to hang out with.

Totally not what I expected.

As I said in another post, several of the guys on the desk were complete jokesters, which made for a great atmosphere to work in.

For example, one guy who was really into fashion, Monty, bought a pair of crazy expensive shoes from a local high-end shoe store. The shoes didn’t fit when he got home, so he brought them into the office to return them after work.

One of the other guys sent an assistant trader down to the convenience store on the corner, and had him buy two cans of soup.

Monty took a bathroom break. And, cans of soup replaced the expensive shoes in the shoebox.

The next day Monty wasn’t souper happy (get it?) when he came into the office and explained how he had taken the shoe box back to his high-end shoe shop and tried to return the cans of soup as shoes.

He got the shoes back.

There was a constant battle of wits to see who could set-up the next trader for the most embarrassing moment. I miss those guys.

So my assessment of market makers was completely off base, 180 degrees.

Stock Warrant Money Makers

I’ve written here often about the Beach Ball Trade, recognizing mispriced warrants, like PHUNW, and trading SPAC warrants.

And most of the questions I get concern these topics. Totally understandable.

But, while each of these types of trades are low risk/high return, they are not where I’ve made most of the money I’ve made in warrants. Most people are surprised when they hear this. It’s not what they expected.

The distinction of most money making trade goes to…the Percentage Hedge, or warrant arbitrage.

I really need to come up with another name for this trade. Sounds very antiseptic.

This warrant arbitrage trade makes money on a stocks up and down movement. Since the beach is my favorite place in the world, I really like the name I came up with for the Beach Ball Trade.

So, in sticking with the beachy theme, I’m going to dub the percentage hedge the Snorkel Trade.

You get the up and down of the ocean as you float when you’re snorkeling. And, you see the up and down as the water rises and falls on your goggles.

The gentle up and down rocking is a soothing feeling. You’re floating in crystal clear water without a care in the world. It’s the same with the Snorkel Trade…minus the fish and turtles.

So, let’s talk a minute about the Snorkel Trade.

Warrant Arbitrage in the Snorkel Trade

In this warrant arbitrage trade your position is always long some amount of warrants and short, or flat, common stock. That means the common must be shortable. Or, the stock must have call options that can be shorted.

This is a very low risk/possible high return trade. You’re hedged to some degree almost all the time. This makes it very low risk.

And, the returns over time can be very high. Each individual trade likely won’t be a high return, but they add up fast.

Warrant arbitrage with The Snorkel Trade is very flexible

Anyone can do the Snorkel Trade. It can be a day trade, a swing trade, or a trade you check in on once a week (or even once a month).

Since the position is hedged you’re protected from any large loss. Ideally you would be able to check on the trade each day, but a few times a week, or even once a week is fine with this trade.

It’s a great trade for using alerts and just checking when the alert goes off.

You can check the trade on a movement based alert. Since you’re only going to be adjusting your position when there is movement in the stock or warrant.

The trade is a combination of science and art. The science is checking the historical price of the warrant in relationship to the stock.

Does the warrant trade at a $.50 to $1.50 premium, or a $1.25 to $2.00 premium range? You can use a model like Black-Scholes, or just plug some numbers into a spreadsheet. I just use the spreadsheet method myself.

It’s not complicated. Again, anyone can do it.

The Snorkel Trade can win in any market

The art part is in adjusting your hedge as the stock moves. You’ll be shorting into a rising stock, and buying to cover a falling stock. This means you’ll have to overcome some Wall Street “isms.”

But that’s easier since this type of stock warrant trading means you’ll almost always be hedged.

You’ll be ignoring “never short a bull market” and “never catch a falling knife.” Because the Snorkel Trade makes money on “a stock never goes straight up, or straight down.”

My most recent application of the Snorkel Trade was in TWNK and TWNKW.

As I had told you guys, I got long the TWNKW warrants prior to their earnings announcement in early May.

When the stock jumped on earnings I profited on the warrant’s rise, and I shorted a some common stock against those warrants on the good news.

A few days later the company announced a secondary offering. This moved the stock lower, and I covered my short position, making money on the way down. Up and down, up and down.

Gaming

I love gaming. A great way to have fun with this trade is to gamify it.

Remember, a great way to keep your attention on your money goals, as opposed to Words With Friends, or Fortnite, is to make a game out of making money. If this stock warrant trade is a game, how do you win?

Your goal is to get the cost basis of the warrants you own to zero. And, if you’re able to do that, you’re next goal is to make the cost basis as negative as possible.

One of the best things about the Snorkel Trade is you can play this game in a rising or falling market. You just need a little bit of price action up and down.

The warrants provide a safety net for unexpected news to the upside. And, the short stock can win big on days when the market tanks, as it has often in recent weeks.

Conclusion

The Snorkel Trade is the meat and potatoes of stock warrant trading world. So, not as sexy as a the Beach Ball Trade, with it’s quick return. But, the Snorkel Trade is available in some warrant out there almost any trading day.

Give this low risk/high eventual return trade a try.

Reminder, later this week (May 20th, 2019) marks the fifth edition of the Warrant Observer newsletter. We’re going for win number five on our warrant trade. Get in on the action here.

If you’d like more info on the Snorkel Trade, as well as several other techniques that show you how to make money in warrants, check out the Warrant Secrets course here.