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Mispricing on BAC Warrants ?


anders
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I know many of you bought BAC warrants.. Im thinking of switching my common to the warrants but get confused on current market pricing.. Based on B&S formula, I get that the warrants should trade in the range of $2.15-$2.35..? instead of the current $4  ???

 

Warren buffett got 700m with strike just above $7.14.. the value on 25th aug were approx $5.49 per warrant.. B&S formula indicate a fair value more like $4.5 for his warrants..

 

Are BAC warrants mispriced in the market? do they trade with a premium? What am I missing?

 

 

Grateful for an answer,

 

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Generally I think you are right Anders, especially if you were to buy the common on Interactive and pay like 2% to borrow. However, the strike on the BAC_A warrants reduces by $.01 for every $.01 the dividend is above $.01 each quarter, so if someday BAC pays $1 in dividends on an annual basis, you are looking at a $0.96 reduction in the strike for that year alone. So, much more then time value going on here...

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Many thanks  :)

 

So the question comes down to the dividend planning.. more than $7 from jan 2012 - jan 2019.. = undervalued.. less = overvalued.. give or take..

 

I know Im being lazy here but does anyone know the average payout ratio for BAC ?

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Many thanks  :)

 

So the question comes down to the dividend planning.. more than $7 from jan 2012 - jan 2019.. = undervalued.. less = overvalued.. give or take..

 

I know Im being lazy here but does anyone know the average payout ratio for BAC ?

 

Between 3-5% during the '02-07 hey days.

 

Color me a cynic, but to sustain a $1 dividend the common would need to trade at $30+/share.  I'll be very surprised if this happens by next year. Plus, if one is confident that a dramatic re-rating would occur, there's more upside in vanilla call options.

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So, during 02-08 period they paid out a total of approx $10.36 to shareholders... and now they need to pay approx $7 the coming 7 years to justify current level of price of the warrants..  ???

 

oh, I don't know...the seven good and the seven lean years comes into mind..

 

 

 

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The implied volatility has a significant effect on the warrant price.  With the stock cratering and then popping after the Buffett deal, the realized volatility increased.  The market tends to factor in an increased implied volatility when historical volatility increases.  When daily realized volatility comes down from recent levels, as it likely will, the warrant price will come down as well, all else being equal--including the scenario where the underlying BAC price remains the same.

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