Most of you guys know my story by now. I developed a big interest in the stock market when I was in my early 20s. I had no idea what I was doing (as in I lost money big time), but I was fascinated by the stock market.

I went to law school, where that interest was fed by securities and corporate law classes, and then ended up at NASD Regulation (now part of FINRA) where I focused on short selling and options.

From there it was off to Wall Street, market maker on the Fidelity Nasdaq desk, and then on to a hedge fund, trading the former Fidelity head trader’s money.

It was in those years as a market maker, and then sitting beside of a seasoned professional trader and arbitrageur, that I got my trading / investing education. Those were my formative years as they say.

One day while working at that first hedge fund I asked a simple question of the head trader. It’s a question I see hundreds of times a week in various internet groups, and that I get from readers who honor me by reading my drivel.

“What should I do?”

In my case I had a long position in a stock and was asking whether I should sell it or not. But the question comes in various forms. “Should I buy this stock?” “Should I sell this stock?” “Should I take profit here?” “Should I cut my losses?”

I had been trading the stock for a while, which is a great way to learn stock trading by the way.

The answer I received was just as simple as my question, but was an answer I’ve remembered ever since. Mainly because it has made me a lot of money, both in trading and in business.

The head trader, and owner of the firm answered, “Where do you think the stock is going?” Hmmmmmm. My answer, “Down.” and then the obvious reply, “Then I’d sell it.” followed by a chuckle.

Les knew something that I had yet to recognize. He knew I’d been trading and watching the stock daily, and that I was more of an expert on how the stock traded than he was. Even if he had years and years more trading experience than me.

He knew, I knew the PATTERN the stock was trading better than him.

I knew when it was near a short term top or bottom. Whether it was trending up or down. How volume, either high or low, impacted trading. And many, many other little things that are easy to see when you follow a stock closely.

Some patterns, like how a stock trades on a daily basis, are harder to get a feel for because of the time commitment required. You really need to watch the stock daily for most of the day.

How does it act when certain technical indicators are applied? Does one technical indicator, or a combination of a few, work better than others? How does it act around earnings? Etc. Etc.

You’ll easily make more money than others who do not know the pattern…you’ll actually be taking their money most of the time. But, the cost in time is HUGE. The monetary rewards are worth it, but its ALL you get to do, all day, every day.

While I loved trading for a living, I also didn’t want to ONLY trade all day, every day, for the rest of my life.

So, I needed other Patterns I could trade that would let me do other things during the day that I also loved to do. (Sleep in, corporate strategy, spend time with my kids, sleep in, teach others about the stock market, drink, stay up late…sleep in.)

I needed patterns in the stock market that didn’t take ALL of my time, but that I could still trade and invest in with the confidence I had when trading a stock on a daily basis. What I needed were more “rules” based patterns, that had less “feel” involved. Like warrant arbitrage.

While it obviously helps to know how the underlying stock trades, I found you can make good money without watching a stock on a daily basis. That’s because these larger patterns exist that aren’t based on daily fluctuations. Patterns like the Beach Ball trade.

Are these patterns always right. Of course not. But, they do give you quite an edge, and that’s really all you need to make GREAT money in the stock market, even if you trade just a few times a year.

With all of that in mind, here’s my latest take on Phunware (PHUN) and the warrants (PHUNW) as of JANUARY 19, 2019.

As you know I have a position in the warrants (a very small, lottery ticket sized position) and have been following the post SPAC integration story. It’s extremely interesting and fun to watch with all of the gyrations in the common stock. (I’m going to try and work that into each and every post I do on Phunware from here on out, be forewarned.)

As most other warrant holders, I’m waiting for the registration statement to be filed for the underlying common shares. And, I’m thinking, “What do I do” when it is.

This particular former SPAC warrant is a little different than most. But, as always, the first thing I do is look for a pattern to apply. In this case I see two patterns. First, when the warrants become exercisable, the common should act like common stock often does in an oversubscribed rights offering.

That means the common stock will come down. Not complicated, it’s simple supply and demand. As shares hit the market from investors exercising warrants they’ll take profits and sell the newly minted common. Short term: a drop in the stock when the warrants become exercisable.

Obviously, the big question is how far does it come down.

Second, the warrants are simply undervalued here. This is the “Buy Cheap Warrants and Hold On” pattern I talked about briefly in my last post.

Not only is PHUNW undervalued on a conversion basis to the common, as in one warrant plus $11.50 gives you one share of common. (As of right now, with the common at $142, that would make exercisable warrants worth $130.50. And yes, they do have to be exercisable for this to matter.)

But, they are also undervalued from a time and volatility perspective. More common shares on the market will dampen volatility somewhat, but these are 5 year warrants on a stock in the cryptocurrency world that we know is volatile.

They’re worth more than the current $.60. (I think a good C’Mon Man is appropriate here.) (CAVEAT: This model will be mute if Phunware redeems the warrants, which I feel is highly likely.)

Bottom line, when the warrants become exercisable, my patterns tell me the short term move in the common is down and in the warrants it’s up. Once the dust settles from that move I’ll reassess (as in, I may have sold all or some of my warrants if they’ve moved up) and determine if there is another pattern in play that I like or not.

Learn about some of the other patterns I use here, the first one’s on me.