Most traders and investors tend to buy a company’s common shares but there is also another way an investor or trader can profit from a company’s upside: warrants. Often times (but not always) when a company has issued warrants in conjunction with a financing, they get them to trade just like the commons.There are many instances that trading the warrants could provide a more sizeable return on investment similar to a leveraged position but without the need of margin. If you are not familiar, warrants are a contract that gives the investor the right to purchase a security at a set price, for a specific period of time before the date of expiry date.
In the first example we will be going over the chart of Organigram (TSX-V: OGI) and compare the chart to that of the Organigram Warrants which trade under the symbol (TSX-V: OGI.WT.A). According to CanadianWarrants.com, Organigram warrants have an exercise price of $4.00 per share known as the “Strike” price and will expire on June 18th 2019. This means that the warrant holder has the right to purchase common shares at $4.00 per share before the expiry date. In the case of Organigram, the warrants are trading and an investor can purchase them on the open market at a price that is called the “Spot” price. At the time of writing, Organigram warrants currently trade at a price of $5.36. This means that an investor would need to pay the “Spot” price of $5.36. f the investor wishes to exercise, the cost basis of acquisition of the commons would be $9.36 per share (cost base = warrant spot + exercise price). In this example, if the price of OGI commons is above the $9.36 it would be profitable to exercise. Organigram closed at $9.44 today giving a difference of .08 making the exercise profitable. Most investors will not exercise their warrants but simply trade them speculatively, because warrants should trade in correlation with the common shares but often times provide great arbitrage opportunities because they are overlooked. In some cases, savvy investors can buy warrants at a discount as a leveraged way to get exposure to a company because they should eventually get to their Fair Value. If the warrants do not trade to fair value before expiry, it would be profitable for the investor to exercise.
Here is how this has worked out on Organigram. Shares of Organigram have had a great return since it bottomed in the low $4.00 range in December 2018 and have rallied above $10.00 in April 2019.
The image below is a 6-month chart of Organigram Warrants under symbol OGI.WT.A. The warrants hit a low of $1.11 in December and firmly traded above $5.00 for most of April and early May. If you overlay both charts, you will no doubt see that there is a very high correlation.
The chart below is a 6-month comparative chart of the common shares and warrants. The commons (candles) had a 152.50% return during the 6-month period, while the warrants for provided investors with a 231% return. The warrants provided an extra 79% versus the common shares.
Zenabis Global Inc. (TSX-V: ZENA) is another stock that has tradable warrants as ZENA.WT.
There is no question that shares of ZENA have been under extreme pressure in 2019. Zenabis seem to be consolidating within the $1.70 and $1.80 range now as the dust settles. There is a very obvious gap on the chart in the $2.50 range which gives us a first target on a trade. Equity Insight recently published an article on the fundamental case for ZENA which can be read here and outlines the catalysts. Additionally, Zenabis Global intends to up-list its security from the Venture exchange to the main TSX market. There are no lack of catalysts which can push the stock higher and potentially close the gap to the upside.
Below is a chart for ZENA.WT which have been trading for less than 30 days. As we can see right away is that the warrants soared from the low $0.30 to $0.83: definitely not in correlation to the commons.
Below is a comparison chart of Zena common stock (candles) and the warrants (red line) for the month of data available. As we can clearly see the warrants have dramatically outperformed the commons but not without a healthy dose of volatility .
Looking at the 10-day chart below, we can definitely see a correlation between both the commons and the warrants. Warrants are a derivative of the common stock and thus eventually trade in a high correlated fashion although, in most cases offer higher volatility and a potential higher percentage return.
Warrants for Zenabis currently trade at $0.61 cents at the time of writing, and has an exercise price of $2.75 with an expiration date of April 17th 2022. According to CanadianWarrants.com, based on the current price of ZENA, ZENA.WT have a fair market value (FMV) price of $1.28 for warrants of ZENA, which would provide an investor with a 109% gain based on a $0.61 entry.