Volatile Market, Illiquid Warrants, No Problem
You only have to suffer through the pain of being trapped in a low liquidity investment once, and you’re scarred for life. That great position can be cut in half in very short order in today’s reignited volatility.
So, having learned your lesson you find a stock to purchase with decent volume. But wait, there’s a warrant on the same stock that offers some nice leverage, even better. You pull up a chart of the warrant and Red Alert…no volume.
Game over man…not quite. There’s a way to have your cake and eat it too (mmmm cake). You can buy that low volume warrant, as long as the common stock is shortable.
Let’s look at this checklist style:
- The common stock is shortable
- The borrow doesn’t cost you an arm and a leg
- There is no huge dividend about to be declared (if you’re short the stock when this happens you get the pleasure of paying the dividend)
That’s it, short and sweet.
If the stock starts to fall out of bed, you can short the common to lock in a hedged position. You can then trade out of, or around, this position to both limit losses and possibly even profit from a missed directional bet.
If the stock rises, but no one seems interested in your warrants offered at a higher price, you can short common into the gain. You can then either exercise the warrants to lock in a gain, or if possible, trade around the position for a further gain.
BONUS INFO
Always do the more difficult side of the trade FIRST! If you’re long a warrant that trades by appointment then offer the warrant out and wait to be taken before you cover your common short position. I don’t know how many times I’ve seen money lying on the table and I’ve taken off one side of my hedge only to not be able to get the other side off. And you know how that goes, the second you take off one side of the hedge your un-hedged position turns against you.
Here are a few warrants / common that fall into this low liquidity situation right now. The common stocks listed below are shortable as of this post, but could become unshortable at any time, so make sure you follow the checklist above.
- BPFH/BPFHW
- COF/COFWS
- CMA/CMAWS
- FFBC/FFBCW
- JPM/JPMWS
You can find additional warrant / common pairings, along with the warrant terms, here.