GM Warrants Have a Best Before Date

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A blogger friend of mine “Bear with the Bull” emailed me yesterday with a question regarding General Motors warrants. He thought that it would also be a good general topic for a blog post. I thought that there may be other investors who are in the same boat and could use some additional information. Here is a portion of his email.

“Well my mother in law was asking about warrants.  It seems they had an investment in GM before GM filed for bankruptcy, my guess is they did nothing with it, and now she says GM is sending them warrants regarding their investments in GM.  Not sure if this make sense as a result of the bankruptcy filing or not but it might.  Also I do not know if what they had before was strictly stock or not.”

“I know warrants are basically options issued by the company instead of the exchanges  and it seems that these warrants expire next year.  She was asking what all this meant and if she should do anything about them”?

Apparently GM issued two warrants as part of the bankruptcy settlement. Not sure if my friend’s mother in law has the A or B warrant or both but they do have different values and expiry dates.

Key Factors Regarding Warrants

  1. Warrants like call options have an exercise price which allows the owner to exchange one warrant for one share of stock. GM warrant “A” has an exercise price of $10.00 and “B” at $18.33 which are bargains because the current price of GM stock is around $33.50! In simple terms you can purchase a $33.50 stock for $10.00 or $18.33 based on which warrant you own.
  2. Warrants also have expiry dates which forces holders to convert their warrants into stock. Warrant A, expiring July 10, 2016 and Warrant Bexpiring July 10, 2019. Most full service and discount brokerage firms will automatically convert the warrant into shares if the price of the underlying stock is above the exercise price on the expiry day. However, if the stock price is below the exercise price then the warrant will expire worthless!
  3. Warrants can be exercised at any time, you don’t have to wait until the expiry day. Plus they are listed on stock exchanges and trade just like stocks but they are not eligible to receive any dividends. You do have the option to sell your warrant in the open market at any time. (Ticker symbols; GM.WS.A & GM.WS.B)
  4. Both warrants and options trade based on the price movements of the underlying stock plus a time premium. Typically, a longer expiry date will be awarded with a higher time premium. The time premium value also moves based on what investors’ expectations are for the future value of the stock.

Unfortunately, my friend’s mother in law missed a golden opportunity to sell the warrants for a larger profit, back in mid-March of this year. The time premium for both warrants were much higher than today. See the chart below:

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The blue line represents the price movement of GM warrant “B” which has a longer expiry date compared to the brown line representing warrant “A” and the black line is the price of GM stock.

I don’t envy my friend at “Bear with the Bull”, giving financial advice to family is really tricky. Regrettably, I don’t own any shares in GM and have no helpful suggestions on what to do with these warrants. The good news is that GM stock is currently trading above the exercise prices of both these warrants. The bad news is the time premium has been reduced.

Keep in mind, earnings release date for General Motors is Oct. 21 and investor’s future expectations could change based on vehicle sales in China. Could be positive or negative for the  price of the stock and the warrants. I hope that this blog post sheds some light on warrants in general.

 

 

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