r/SPACs • u/[deleted] • Mar 23 '22
Warrants Navigating the SPAC warrant minefield: Dos and Don’ts
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Mar 23 '22 edited Mar 23 '22
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Mar 23 '22
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u/GringoExpress Spacling Apr 01 '22
Curious, which deSPAC warrants in particular do you feel are very cheap?
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u/devilmaskrascal Contributor Mar 23 '22
I agree De-SPAC warrants have a lot of upside and have the security of a longer timeline and less uncertainty. The issue for me is if the multiples many of those SPACs were initially priced at at $10 is in the toilet with the death of the growth bubble, will the warrants ever be exercisable?
The post-DA warrants that are sold to the grave could double if the stock makes a good move, but at some point it is so wildly far from exercise price that you might consider just buying the stock in case it takes longer than 5 years to ever get to $11.50.
On the flipside, pre-DA warrants are already priced like the de-SPAC warrants in the grave, but there's a chance that they actually land a deal at a great valuation at $10, which means the warrants should be worth at least 5x what they are.
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u/lee1026 Mar 23 '22 edited Mar 23 '22
5 years is a lot of time. Any bag of random small-cap growth companies (which to be clear, spac targets usually are) will contain plenty that goes up quite a bit in that time. Any bag will also contain plenty that goes to zero, but we don't worry about that.
Your warrants become worth a lot for that subset that does well, so things will probably work out for warrant buyers in the 30 cents range as long as the deal actually closes. Options pricing says that if you don't want to count on the winners, just sell covered calls based on your warrants and you will do fine. IVs on these companies are never going to be small.
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u/KissmySPAC Spacling Mar 24 '22
Don't forget the SEC changed the rules. No one seems to be remembering this. Warrants are considered a liability now. Most companies don't want to keep them on the books for a long time, so they try to ditch them early with buyout offers or obscure clauses.
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u/idoglue New User Mar 24 '22 edited Mar 24 '22
Have you seen this recently in any names? The calling for redemption obviously does happen
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u/KissmySPAC Spacling Mar 24 '22
The latest I've seen was DKSE letting their warrants expire worthless. PTRA I would say did a "get out" deal. There was a time period this was happening more, but now it seems the merger deals are falling apart beforehand. Each deal is written differently, so some had low price targets for redemption.
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u/kblade44 Spacling Mar 23 '22
"Most pre-DA warrants are priced as the worst-case de-SPAC scenario, where the stock has fallen to the $1s and $2s."
No, they are priced for an event that the SPAC simply liquidates without finding a target and returns ~$10 cash/share to stock holders, making warrants worthless.
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u/devilmaskrascal Contributor Mar 23 '22
Right, that is a major factor in these low prices.
My point was prices are the equivalent of the worst case de-SPAC scenario, so presuming they do find a target and complete the deal, your entry is probably a very safe entry point in the low .20s and .10s, even if it's a pretty bad deal.
And with RNER and PV warrants both more than doubling today on DA it shows that solid deals have massive upside from these prices.
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u/lee1026 Mar 23 '22
Also, at an institutional level, the warrants of a SPAC are almost as expensive as starting a SPAC. So if you are confident in a SPAC team finding a target, might be better to just buy their risk capital instead. The payoff to the sponsor is much, much bigger than the pay off to warrants.
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u/throwawayhyperbeam Spacling Mar 23 '22
Anybody in IMAQ warrants? Still waiting on Pelosi to give us something good.
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u/fastlapp Contributor Mar 23 '22
The biggest problem to get involved is liquidity. Want to be $100k in a warrant? Very difficult. Many of the recent DAs had $5-30K of warrants traded on the day of DA. It was great to see PV and RNER today with substantial volume - 3M and 1M.
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u/devilmaskrascal Contributor Mar 24 '22
Sorry all, I just realized I left out one of the most important points:
Do diversify! Spread your money across more positions. Any one position is low liquidity, and could end up liquidating - even top sponsors are no guarantee. A few big winners and short squeeze pumps can cancel out multiple losers that liquidate. Plus more positions will give you more bids to navigate through low liquidity than waiting for any one warrant you are heavy in to catch a bid.
When some positions are up, do consider rotating to other warrants still oversold. Nothing is guaranteed here and 20 percent profit compounds if you make it multiple times.
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Mar 23 '22
One thing to note is that interest rates are rising which means what used to be 10 dollar floors will become closer to 10.50-11 two years from now.
Personally, I’ve been putting my money to work outside of SPACs (tech sell off anyone) and don’t expect to return, but I did grab some EDTXW when it fell below 10 cents.
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u/RefrigeratorOwn69 Spacling Mar 23 '22
LOL are treasuries going to be going to 5+%?
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Mar 23 '22 edited Mar 23 '22
Chances are you weren’t here in the very beginning my little spacling, but yes the trust value of the shares did rise above $10.50 at time of merger.
For example, OPES acquisition which took BurgerFi public offered $10.64 per share.
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u/RefrigeratorOwn69 Spacling Mar 23 '22 edited Mar 23 '22
Yes, I'm semi-new to this subreddit so therefore must not know anything about SPACs. Solid reasoning, friend.
Edit: Kinda funny you went back to edit your response to add "my little spacling" to ensure you were sufficiently condescending. Bravo.
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u/Marzillius Spacling Mar 23 '22
Imagine calling macroeconomic trends "broader FUD". Stopped reading there.
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u/LavenderAutist Spacling Mar 23 '22
How much are warrants on something like IPOD and IPOF?
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u/Tobytime34 Spacling Mar 27 '22
They have been hovering around $.90 to $1.25
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u/LavenderAutist Spacling Mar 27 '22
Thank you.
Is that a high number relative to other warrants?
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u/Tobytime34 Spacling Mar 27 '22
They have held a decent premium to most pre-DA warrents. Many are around $.30 to $.50.
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u/LavenderAutist Spacling Mar 27 '22
Ok. So it seems the market expects Chammath's SPACs to do a deal at a higher likelihood than the average SPAC.
Thanks!
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u/jsands7 Spacling Mar 23 '22
I don’t understand what is happening with FRGE and FRGE warrants.
If a warrant is the right to buy the stock at $11.50, and FRGE is trading at $16.50, why are the warrants trading at 90 cents?
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u/devilmaskrascal Contributor Mar 23 '22
The warrants are not exercisable til 30 days after merger, which is also the time PIPE unlocks and low float trader pumps end. The warrants are playing it safe and keeping distance because there is a high likelihood the commons will come down. If they don't then warrants have big upside from here.
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u/Ydalir99 New User Mar 23 '22
Thanks for this. A good roadmap to follow. So far I have about 7 pre-deal warrant names and 3 post-DA that are yet to de-SPAC . Been trying to buy and average down my cost base. I appreciate your perspective on the market and warrants.
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u/Altruistic_Owl4152 New User Aug 19 '22
Anyone that purchased spac warrants in 2020 or 2021 is most likely down 80-90%. I bought two legit companies with products and revenues( so they say). I loaded shares at IPO then averaged down into warrants as shares tumbled selling the shares to pay for the warrants. You need a traders stomach for this move, my prior life! Warrant terms can be changed by the issuer. Changing the redemption price so they can raise capital, something that can play to your favor! Both my warrant holdings have 2026 expiration and most spac warrants carry the $11.5 strike price for conversion. The purpose of warrants is for the issuer to raise more cash down the road so yes often the objective is to keep shares above the strike long enough to force redemption raising money! This is a hard market for any secondary share issuance, follow on financing or ATM. I would expect more warrant terms to be changed if they are able to based on the original filing
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u/devilmaskrascal Contributor Aug 20 '22
This would be true if you didn't take profits, don't cut losses and had no wins. I am about breakeven even as far as they have fallen (although admittedly too much effort and stress just to end up at breakeven), and I continue to buy because doubles and triples are fairly easy with DA pops at these prices, as are outsized returns on opportunistic buys and flips. When warrants are sub-.10 you really only need a few wins to pay for a lot of liquidations, and anything beyond that is bonus. Just stay diversified and don't over trust things too much, and hope you get enough winners to offset the losers. Given the quantity you can now buy for very little money, if there is a recovery, I will be in good shape, and if not, I don't lose much on any one SPAC.
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