I see some nay sayers on this post, I have followed AIG for close to two years now, I am heavily invested on warrants and have been making good money, I am not a day trader, so I am happy to sit on my AIG investment for the long run. Can anyone give me a reason to be worried? all I read about AIG management moves is good for the short and long term. Nay sayers take a shot!
Check the action today. How the warrants can move in the opposite direction as the common and the whole market is a mystery to me. I can make answers up as glibly as the next guy, but there's no way the warrants are "efficiently" priced.
The warrants will have their max theoretical time premium when AIG is at 45.00
On May 21, 2013 when AIG closed at 44.96, the warrants closed at 18.50
With the warrants now in the money by almost 5.00, they are priced at less than 1.00 above their strike price value.
As the pps rises above 45.00, the warrants will gain intrinsic value but lose extrinsic value (time premium). At the current price, there is now around 14.00 of time premium in the warrants. Due to the large time premium, the Delta will be working against the warrant holder.
If you want a long term leveraged play, think about owning the Jan 2015, 30.00 calls for about the same price as the warrants. You would be paying less than 1.00 for time premium, but would be gaining close to 1 for 1 on the upside.
I can only agree with you on this one. I bought last December, I cannot complain with a 30% plus return over a period of less than a year...but the warrants have actually slightly UNDERPERFORMED relative to the underlying AIG stock!!!!
When you buy warrants, even long dated ones, you are doing so for the leverage effect so you expect them to overperform if the underlying goes up significantly, time value of money notwithstanding. I guess the warrants were grossly overpriced last December relative to the underlying. HIG-WT would have been a much better bet (cactionalpha was recommending them also, thanks cactionalpha btw, good call!).
I still believe these warrants will pay handsomely if held until maturity, 2021 is indeed a lifetime away. Imagine if the stock is at 100 or more by then?! But in the short-term, price action like today which sees a drop in the warrant price while the underlying is up almost 1% is slightly disconcerting. I guess you just need to stop looking at it and get a nice surprise in 2021!
2021 is a lifetime away and I'm sure there will be many short time worries for example natural disasters, a bear market, and plenty of others but we have a good company here with great leadership so I'm confident we will do well. Cheers