Post Ford Warrant Expiration

We’ve been following the Ford warrant expiration here in very great detail. We described how the stock would likely trade leading up to the final day of trading for the warrants, what the expiration would mean (including a comparison with the recent GM buyback), and what the stock would likely do (move up, haha) as the warrants stopped trading. Now we’ll take a quick look at a typical post warrant expiration pattern, but with some very important differences with this particular expiration.

First, let’s talk about a typical expiration pattern. As the expiration nears we often find the stock moving lower (often toward the strike price if it is anywhere near that price around the time of the warrant expiration), or at least pinned to a price into the expiration (for Ford this price was $11.50). Around the day the warrant ceases trading, maybe a few days before and maybe the day after, the stock typically moves up as the shorting pressure from arbitrageurs is lessened. After the expiration, somewhere between a few days and a few weeks, those who exercised their warrants will receive the common shares in their accounts.

Typically, when the shares are received there is a bout of selling, as those who were happy to hold 1,000 warrants worth $2,000 do not want to hold 1,000 shares of stock worth $13,000. The reasons are many, but suffice it to say as the shares are distributed the holders of those shares normally trim their positions and pressure the stock. How much the stock is pressured can be dependent on many variables; how the market is holding up, what the fundamental picture looks like for the stock, and what the technical picture is telling traders are a few. Regardless, the day the common stock from the warrant exercise hits accounts, some selling pressure should be expected. (Quick tip, to track this yourself simply own and exercise a few shares of the warrants so you know when the common from the exercise hits your account.)

Before we do a final review of Ford (F) in this pattern lets discuss a very important point. While the typical pattern is flat to down into the expiration, a pop on the expiration, and then some selling as the common is received, the highest probability trade by far is the pop in price as the warrants cease trading. The stock trading down into the expiration, or down on selling as stock is received from the exercising, is simply not as reliable. We have watched these situations unfold countless times over the past 20 years, and while there is a general beginning, middle and end to the pattern, the middle part of the pattern (the pop) is the one we most often trade in the most size.

Now, given the typical pattern what should we expect from Ford (F) post expiration? First, lets look at how far we’ve come during the past seven trading days. At it’s high today Ford was up over 15.5% from the $11.50 price we said would make a great buy. The last time you could get this price was seven trading days ago on December 21. That is a big move for a stock like Ford. So in Wall Street speak, it may be over extended a little here.

On the other hand, this warrant expiration is different than a normal expiration as we explained here. Traders are not getting the number of shares they would in a typical expiration, which means the selling pressure from new shares landing in brokerage accounts will be greatly diminished. We also want to take a look at GM to see how far it has run since its buyback, up about 13% as of now, which roughly matches the move in Ford. And finally we have the fiscal cliff deal, which has positively impacted the markets at this point.

So, where does that leave us on Ford? It basically leaves us where we usually are with most warrant expiration trades. And that is, we took a very nice profit in a very short time on the stock popping on the expiration and now we have no idea where the stock goes from here. As we mentioned above, the early and late parts of this trade are less predictable and the probabilities, at least based on a warrant expiration trading pattern, are simply not enough in our favor to either own or short the stock. Our bread-and-butter trade was the pop on the expiration, we captured that profit, and now from a warrant traders perspective, we simply move on.


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