Investors are always looking for ways to maximize their gains and warrants, options and LEAPS are a good way to do just that. These investment vehicles are very similar to each other except for issue of time. [Let me explain.]
The comments above and below are excerpts from an article by Dudley Pierce Baker (CommonStockWarrants.com) which has been enhanced – edited ([ ]) and abridged (…) – by munKNEE.com (Your Key to Making Money!) to provide you with a faster & easier read. Register to receive our bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner.)
A call option is a contract that gives its owner the right, but not the obligation, to buy a specified number of shares at a predetermined price within a set period of time. Most call options have a life of 30, 60, 90 or 180 days.
Call options place you in the position of being a trader looking for short term gains with high risk associated therewith. You have to be correct on the direction of the markets, your individual stock choice as well as the timing of your entry and exit strategy. This is not so easy to do for the average investor with industry statistics suggesting that 80% – 90% of investors will lose their investment. However, for those few professionals who can manage risk and have a short term horizon, this can be profitable and exciting.
LEAPS, which stands for Long Term Equity Anticipation Securities, are also options as defined above but have a longer life of as much as 2 years. LEAPS will give you much more time but unfortunately there are very few leaps on the mining stocks.
Options and leaps are actually created or written by investors who write an option and keep the premium (the amount paid) as income. The underlying company receives nothing.
A warrant is a security giving the holder the right, but not the obligation to acquire the underlying security at a predetermined price and for a specified time. Sounds a lot like call options and leaps, right? Well, yes and no. Warrants are actually issued by the underlying company, normally in connection with a financing arrangement and are sometimes called a “kicker” or “equity kicker”. They are usually issued by the company for at least 2 years and sometimes up to as much as 7 years.
While most warrants will never trade but are held by mutual funds or other private investors who have provided the financing there are almost 100 warrants, however, that do trade freely on either the U.S. or Canadian stock exchanges. These warrants trade similar to their underlying stocks and will fluctuate up and down with the price of the stocks and can be purchased through your brokerage firm.
Warrants originated back in the 1920’s. [Interestingly,] Sidney Fried wrote in 1949 in “The Speculative Merits of Common Stock Warrants” that “…Common stock warrants turn in the most spectacular performance of any group of securities….the speculative potentialities of common stock warrants are enormous….With potential profits and potential losses so great it is a source of wonder that so little understanding of the nature of common stock warrants exists not only among the investing ‘public’, who might be forgiven this sin, but even among the many ‘professionals’ of the business upon whom the ‘public’ depends for information and guidance” and his observation still holds true today.
Most investors and analysts [still] do not understand the potential leverage which warrants can bring to your portfolio. For those readers interested in knowing more of the benefits of purchasing warrants we invite you to visit our website.
Investing in warrants is all about increasing your leverage. In layman’s language this means generating a greater gain than the anticipated gain on the common shares. With what we expect to unfold over the next year or two in the price of gold and silver investing in the warrants of gold and silver mining and royalty companies is the only place to be.