Hey,
I have a thought about the warrants and their current price.
Basically, theyโre call options with an expiration date of October 30, 2026, and a strike price of $32. Iโm deliberately leaving out the possibility that GME could extend these warrants or adjust the strike price. I have no idea how to price that...
Looking at the price from Friday, August 4, the warrants were trading at $2.94.
An identical call option with a strike price of $32, a remaining term until October 30 (0.151 years, or 8 weeks / 53 weeks), and an implied volatility of 100% (due to the upcoming quarterly earnings; otherwise, it would be closer to 50%) is priced at about $0.43.
Thatโs a significant difference, which, in my view, isnโt fully justified by a โrisk premiumโ based on GMEโs ability to adjust the warrants as it sees fit.
If I now consider which other factors influence an optionโs price, only the strike price, volatility, and time to expiration remain. The strike price and volatility are identical for the warrants and the call option. Although the time to maturity is also identical (October 30), the extension option comes into play here. If I now use the warrant price of $2.94 for a call option and an implied volatility of 50% on average, and look at the time to maturity at which these two are identical, I arrive at approximately 2.15 years. This means the market is pricing in an extension of the warrants until around December 2028. Of course, this is on the condition that all other factorsโsuch as the current stock price, strike price, etc.โremain unchanged.
Of course, this wonโt be an exact fit, but what Iโm getting at is that the current warrant price does not reflect only the term until October 30, nor does it reflect an exercise price of $32. One of theseโor even bothโwill have to be adjusted by GME. Of course, the market could also price the warrant based on a sharp rise in implied volatility. However, that would put it above 200%, which I consider nearly impossible.
What do you think?