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Dumb Money Now Starting To Flow Into BAC!


Parsad
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Still plenty of room to rise, and lots of room for continued improvement, dividends and share buybacks, but the dumb money is now finally starting to really come into BAC.  We have sold about a third of our warrants now as it was a huge position.  We have not and will not sell any equity.  Cheers!

 

http://www.thestreet.com/story/11802314/1/bank-of-america-analyst-conviction-buy-after-110-gain-in-2012.html?puc=yahoo&cm_ven=YAHOO

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Why the warrants? They have 6 more years of life and are comparatively more undervalued than the common.

 

I'm also curious as to the choice of warrants vs equity, but at the same time what leads you to "are comparatively more undervalued than the common"?  To me, the warrant price just gives an implied price for the common at 2019 (at this point ~$25), so you should buy warrants if you think it is over that price versus common otherwise.

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Why the warrants? They have 6 more years of life and are comparatively more undervalued than the common.

 

Our warrant position was over twice the size of our equity position...we're just bringing them more into line. 

 

That being said, even with six years left, you still have the time arbitrage risk...thus as time passes, you are going to get decay in the underlying value relative to the equity.  Cheers! 

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That being said, even with six years left, you still have the time arbitrage risk...thus as time passes, you are going to get decay in the underlying value relative to the equity.  Cheers!

 

What does that mean, exactly?  The warrant price should converge to (common price - strike price) as it approaches the end, and there shouldn't be much risk, presuming it is in the money.  What is decaying?  If BAC does what is even somewhat close what we think it will, then the warrants should increase in value faster than the common for quite some time.

 

I guess it decays if it doesn't (or people think it won't) make it into the money?

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I have my LTBH position in BAC, but I have been continually selling puts at-, or slightly out-, of the money for the last six months. The option premiums have been too good to resist. I wrote some March 11-strike puts today for $0.35 per share.  Eleven will probably be my highest strike price.

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That being said, even with six years left, you still have the time arbitrage risk...thus as time passes, you are going to get decay in the underlying value relative to the equity.  Cheers!

 

What does that mean, exactly?  The warrant price should converge to (common price - strike price) as it approaches the end, and there shouldn't be much risk, presuming it is in the money.  What is decaying?  If BAC does what is even somewhat close what we think it will, then the warrants should increase in value faster than the common for quite some time.

 

I guess it decays if it doesn't (or people think it won't) make it into the money?

 

The decay means the warrant premium, calculated using Black-Scholes (yes, unreliable I know), decreases in value as the expiry date approaches.  So assume in six years, the stock is at $20.  There would be no premium at expiry and the value of the warrant would be $20 minus the exercise price of $13...so $7. 

 

If the stock for some reason stays at $15 (assume larger than expected legacy issues or loan losses, systemic crisis, whatever), then the value of the warrants say two years from expiry would be worth $15-13, plus probably about a $2-2.50 premium...so less than the current valuation...and that is due to the warrant value decay.  Cheers! 

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That being said, even with six years left, you still have the time arbitrage risk...thus as time passes, you are going to get decay in the underlying value relative to the equity.  Cheers!

 

What does that mean, exactly?  The warrant price should converge to (common price - strike price) as it approaches the end, and there shouldn't be much risk, presuming it is in the money.  What is decaying?  If BAC does what is even somewhat close what we think it will, then the warrants should increase in value faster than the common for quite some time.

 

I guess it decays if it doesn't (or people think it won't) make it into the money?

 

The decay means the warrant premium, calculated using Black-Scholes (yes, unreliable I know), decreases in value as the expiry date approaches.  So assume in six years, the stock is at $20.  There would be no premium at expiry and the value of the warrant would be $20 minus the exercise price of $13...so $7. 

 

If the stock for some reason stays at $15 (assume larger than expected legacy issues or loan losses, systemic crisis, whatever), then the value of the warrants say two years from expiry would be worth $15-13, plus probably about a $2-2.50 premium...so less than the current valuation...and that is due to the warrant value decay.  Cheers!

 

I see what you mean--I guess since I model it at over $18 (13+current 5), I hadn't really concerned myself with it.  My distribution is a lot more common than yours (I'm at a 3:1 common:warrant ratio), so I can understand decreasing to 1:1 in your case.

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That being said, even with six years left, you still have the time arbitrage risk...thus as time passes, you are going to get decay in the underlying value relative to the equity.  Cheers!

 

What does that mean, exactly?  The warrant price should converge to (common price - strike price) as it approaches the end, and there shouldn't be much risk, presuming it is in the money.  What is decaying?  If BAC does what is even somewhat close what we think it will, then the warrants should increase in value faster than the common for quite some time.

 

I guess it decays if it doesn't (or people think it won't) make it into the money?

 

The decay means the warrant premium, calculated using Black-Scholes (yes, unreliable I know), decreases in value as the expiry date approaches.  So assume in six years, the stock is at $20.  There would be no premium at expiry and the value of the warrant would be $20 minus the exercise price of $13...so $7. 

 

If the stock for some reason stays at $15 (assume larger than expected legacy issues or loan losses, systemic crisis, whatever), then the value of the warrants say two years from expiry would be worth $15-13, plus probably about a $2-2.50 premium...so less than the current valuation...and that is due to the warrant value decay.  Cheers!

 

I see what you mean--I guess since I model it at over $18 (13+current 5), I hadn't really concerned myself with it.  My distribution is a lot more common than yours (I'm at a 3:1 common:warrant ratio), so I can understand decreasing to 1:1 in your case.

 

We were nearly the reverse...about 2.5:1 warrrants:common ratio...in dollar value, not number of each!  :o  We're now about 1.6:1 ratio.  As the stock continues to go up, we'll eventually get that down to 1:1 where we will probably hold the rest for a long time...nice fat dividends.  Cheers!

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We were nearly the reverse...about 2.5:1 warrrants:common ratio...in dollar value, not number of each!  :o  We're now about 1.6:1 ratio.  As the stock continues to go up, we'll eventually get that down to 1:1 where we will probably hold the rest for a long time...nice fat dividends.  Cheers!

 

Oh, I meant in dollar value as well.  I'm at 0.75 warrants:common in shares.

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I am currently at 1.8:1 warrant:common ratio. (In dollar value)  You guys have not taken into account the following:

 

1) The adjustment of the strike price

2) The adjustment to the number of shares you can purchase for each warrant you hold

 

 

 

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I am currently at 1.8:1 warrant:common ratio. (In dollar value)  You guys have not taken into account the following:

 

1) The adjustment of the strike price

2) The adjustment to the number of shares you can purchase for each warrant you hold

 

I was assuming that whatever adjustments occur from return of capital or dilution, would equally affect the common as well.  Cheers!

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I haven't seen Cramer in months, but happened to turn it on tonight after the gym - was actually impressed that A) he admitted he was dead wrong this whole time on BAC and B) recommended staying away from Home Depot, one of the best momentum stocks in the market right now! 

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The easy money has been made with the run-up from about $5 to $12 in the in the last 12 months where knowbody wanted to believe in BofA. The next phase will definitely follow, but it will be a little more modest until we might see around next Christmas prices around $17. Thus only a gain of around/ less than half the value of the past year for the dumb money of folks like Cramer & Co, who joined too late. Of course, if all legacy issues are cleared and behind them, they will probably come closer to WFC's BV multiple over the following years. For a three year horizon, they might even double from current valuations at $12, depending on the underlying variables influencing them.

 

 

-----

 

Bank of America cut to neutral at Credit Suisse

2013-01-09 MarketWatch.com

 

Current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting," Credit Suisse analysts wrote in a note to clients

 

http://www.marketwatch.com/story/bank-of-america-cut-to-neutral-at-credit-suisse-2013-01-09-891212?siteid=yhoof2

 

 

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