Virgin Galactic Calls Warrants, Now What?
As predicted, Virgin Galactic has chosen to redeem their outstanding public warrants as of yesterday evening, March 13, 2020. The warrants are being called on a cashless basis. The full details are in this press release.
The result is a slight hit to warrant holders, as the call values the warrants about $0.62 below where they closed yesterday. But, it could have been much worse if the company had elected a regular way redemption.
With a regular way redemption the warrants, which went out yesterday at $8.07, would have been valued at $3.19. Or $14.69, where the common closed, minus $11.50, the regular way warrant exercise price.
I’ll be the first to admit, I was a little surprised the company decided to use a cashless basis, with companies pulling down credit lines left and right. So, what does this tell us?
Not all stocks are coronavirus victims
First, as I’ve told my paid group, there are certain stocks for which we need to “look through” the coronavirus crisis.
They won’t be affected by the crisis either at all, or to a very small extent. Virgin Galactic is one of those companies. (Paid subscribers, expect another email from me this weekend touching on some other stocks/warrants like this.)
The biggest impact could be a few months delay in their schedule, assuming Dr. Fauci is correct in his statement yesterday that we’ll be locked down for a few weeks to a few months.
The stock falling from the low $40s (where it probably shouldn’t have been) to the low to mid-teens is a gift.
I would even argue there will be more demand for trips to space after coronavirus. If you’ve just faced the chance of getting a life threatening disease, especially as an older person with money, you’ll want to experience life after this thing is over.
Why not book a trip to space?
SPCE management is shareholder friendly, so far
Second, the cashless exercise tells us the company is not in need of extra money. The CEO, George Whitesides, was asked repeatedly on CNBC whether the company would do a secondary when the stock was in the $30s and $40s.
But, unlike Tesla (TSLA), which seems to do a secondary every time the stock rises 10%. Virgin decided to not go into the market again and dilute current shareholders.
And, the cashless warrant exercise means both no additional cash for the company, and less dilution for current holders. My takeaway, they’re good with the cash they have on hand. And, they’re trying to be shareholder friendly as well.
When you think about it, again with the environment we’re in, that’s a pretty confident message they are sending to the markets right now.
So, where does that leave us?
Trading SPCE and the warrants
I started getting long earlier this week as the common stock broke into the teens, making my first purchases in the $18.00-$18.50 range. I was also writing covered calls against those shares, because the weekly premium is just too juicy.
I’ve covered calls and reshorted as the stock fell this week. And, now probably own my position around yesterday’s close, or a little lower.
I did have the good luck to buy at $13.61 yesterday on a 5 minute MACD crossover. And, I day traded the common fairly aggressively yesterday to further bring my cost basis down.
Now, with the announcement of the warrant call, normally that would negatively impact the stock in the short term, just like a secondary. But, here I’m not so sure.
I wouldn’t be surprised at all, given what I said above, if the stock rises Monday into the face of the warrant call.
All of this is obviously somewhat market dependent…if we’re down another 2,000 points on the DJIA at the open…it’s back to aggressive day trading.
So, ignoring the market for now, I’ll long the common but also looking to do a covered call in the warrant. I’ll be using the weeklies, now that we have clarity on what the warrant is actually worth.
I was reluctant to buy the warrant and do this trade previously (though we did do it when the stock originally moved into the teens) not knowing exactly when and how the warrant would be called.
Normally I’d like to get long the common closer to the expiration for a possible Beach Ball trade. But, I want to be long this one to some extent, even before April 13 draws near.
I’ve been trading this one since before the faux IPO, and it has been a bottomless pit of money. I can’t thank Sir Richard Branson enough!
Interested in making bank with (and without) warrants? Click on the link thingy below.