# Instalment Warrants paying dividends at 0



## The Estimator (20 September 2005)

Hey guys,

Just a quick question.  If the price of an underlying share drops below the exercise price of an installment warrant on that share (renders the share worthless) is the holder of the warrant still entitled to dividends?  I'm not sure thats so clear so I will give an example.

BHP is at 2000
I buy BHPIZI with an excercise price of 1950 that matures March/06
BHP drops to 1900 over the month rendering the installments worthless.
If BHP paid a dividend next month would I still be entitled to this dividend even though my warrants are technically worthless?

Hope that makes sense to someone.

Cheers

John


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## malachii (20 September 2005)

*Re: Installment Warrants paying dividends at 0*

You always need to read the info sheet written by the warrant company to be exactly sure of the dividend but generally they will pay the normal dividend no matter what price the share/warrant is.  However they all seem to treat special dividends differently.  For example some of the TLS warrants at the moment seem like a bargain but when you realize that the special dividend component only reduces the amount owed on the warrant and is not paid to you directly it reduces the attractiveness.

malachii


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## The Estimator (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Hehe. Thanks mate. You read my mind.  Where I saw the divs for TSL it was just a total of the normal div, special div and FC.  As a result it worked out for a couple of the installments you were gauranteed at least a 25% return even with the warrants hitting 0.  But late last night I saw on the breakdown of the dividends that only 14 cents of it were regular dividends.

If the loan amount was reduced by the special dividend wouldn't that imply the warrant price should hold even if the share price drops at exdiv date as a result of the special div payment?

John


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## malachii (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Depends on the warrant and the time left. TLS has a $5 warrant tht expires soon. There is no way TLS is going to hit $5 in the next short period (week o so I think) therefore reducing the loan amount by 6 cents is not going to effect the warrant price at all.

malachii


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## The Estimator (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Theres one for 21 at the moment that expires in december. I doubt it will get back above its excercise though.  But I was thinking that even if it held 50% of its value youd still get a 50% return taking the 20c dividend (Inc. f.c.)


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## malachii (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Trouble is you only get 14 cent dividend, the special dividend is taken from the amount owing, (it's a $4.75 warrant from memory so that means that it will owe $4.69 - I think still a pretty big ask between now and end of december for tls to reach that) so essentially the only value it will have at the end of this week is time value - my guess maybe 5-8 cents (dont forget tls will drop 18-22 cents ex div - again my guess only).  

Yes - I haven't included the franking credit in the above example because that will have a different effect depending on your tax rate.  

With TLS potentially going to $4.25 by the end of the week for me I think there are better investments elsewhere but each to their own.

Please bear in mind that this is my opinion only - others on this site and obviously out in the market place may totally disagree with me!!  Be warned - I have been completely wrong before many times!!!!!!!

Malachii


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## The Estimator (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Hehe.  No need to defend yourself.  I'm just thinking out loud.  I'm only new to this share trading game.  I find it helps to get the ideas down in text and see what response it gets.  Half the time I answer my own questions as I'm typing this stuff out.

John


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## RichKid (21 September 2005)

*Re: Installment Warrants paying dividends at 0*

Have you seen this one? Not sure if it's suitable, I have no experience in these things so be careful of my interpretation as it is likely to be wrong. For what it is worth:

TLSIMY Call 29/09/05 (TLS ex-Div on 26 Sep 2005)
Exercise: 5.000 
Ratio: 1 
Bid: 0.145   Offer: 0.155 Last: 0.155 Volume: 40,000 

My understanding of the relevant Macbank pds is that you get paid 14c (ff @ 30%) and 6c goes towards paying off the $5 loan amount, so you only need to pay $4.94 to buy one TLS share. Is that correct? 

I think the main factor is the franking credit as there is clearly a premium built in to the warrant atm above the div value (about 1c extra at market). So a lot depends on your tax bracket and strategy. 

So once it's ex div you can buy one TLS share for $5 (the value of the 'completion payment'). So Assuming you pay 15c for the warrant you end up paying $5.15, my guess is TLS will be around $4.20 by then, or lower. So you have got the value of the franking credit (6c?) and 14c in return. Best option normally is just to let the warrant expire worthless I guess.

Crashy/Money tree has mentioned this warrant div strip before. Might be good to check with an accountant or tax professional about the tax implications.


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## The Estimator (25 September 2005)

*Re: Installment Warrants paying dividends at 0*

yeah saw that one.  The problem was that it expires not long after exdiv.  Even if you chose to exercise the warrant and buy the underlying shares I still interpret the rules that this would be a breech of the 45 day holding period rule and as a result would forfeit the fc's.  My theory was to buy into one of the lower priced warrants that expired later than 45 days after exdiv.  This way the fc's aren't forfeited and with any luck the warrants themselves would still maintain some "time" value (assuming tls was still trading under the exercise price).

EXAMPLE

Buy TLSIXN at 20c
Receive Div and fc = 20c approx (14 + fc)
Sell TLSIXN after 45 days at 5c
Profit = 20c (Div) - 15 (loss per share) = 5c per share = 25%

Of course this factors all the FC's as a part of the profit

Sorry if my spelling sucks or I was rambling. I had a big night last night.  :drink:

John


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## money tree (25 September 2005)

*Re: Installment Warrants paying dividends at 0*

https://www.aussiestockforums.com/forums/showthread.php?t=755


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## The Estimator (25 September 2005)

*Re: Installment Warrants paying dividends at 0*



			
				money tree said:
			
		

> https://www.aussiestockforums.com/forums/showthread.php?t=755




Thanks for the link MT. I did a search before starting this thread but didn't find anything.  The only question I have is regarding the fc's.  If the warrant expires within the 45days how is it that you can factor fc's into the profit.  I think I need to read up on this 45day holding rule.  If I can somehow get the fc while trading warrants that expire within 45 days of exdiv then it would be a nice little low risk money spinner.  Though I dont imagine these come up to often.

John


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## RichKid (26 September 2005)

*Re: Installment Warrants paying dividends at 0*

I've moved the discussion on the fc's to this thread so that the current thread can remain focused on the warrants (rather than the tax side): https://www.aussiestockforums.com/forums/showthread.php?p=20278#post20278


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## sails (26 September 2005)

*Re: Installment Warrants paying dividends at 0*

OK - here is a warrant question:

I have been comparing the CBAIMY $38 Instalment Warrant and the corresponding CBAX5 $38 call option, both of which expire on the 29th September.  Some of the large price difference prior to ex-dividend makes sense as I understand the Instalment Warrant is the same as owning the shares plus a put which would have the dividend factored into the put price.   Even so, the price difference between the call and the warrant is considerably greater than the dividend.  Then after the dividend, the warrant traded at a 60c higher premium than the corresponding call.  As can be seen in the chart overlay below, the warrant price is quickly losing premium and is now close to the call price with only 3 days to expiry. 

As interest (cost of carry) is also factored into the price of the call, the cost of borrowing should not make that much difference.  Does anyone know why the warrant is so expensive?  Or is it a case of trader beware?


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