Thursday, July 28, 2011

Trying Something Different...

Today I made an interesting trade - it's not really a new investment but rather a different flavor of an old one.  The company I'm talking about is Bank of America, and what I did was buy the class "A" TARP warrants ("BAC-WTA" on yahoo finance) while at the same time selling my 2000 shares of BAC common stock.  I purchased the TARP warrants for $4.52 (costing me $18,085) and sold the common for $9.76 (netting me $19,516).  In other words, I simply exchanged the common for the warrants.

For those of you not familiar with TARP warrants I suggest reading the following as a quick primer: (the relevant commentary is on pages 2-5).  As you can see the terms for BAC-WTA are really quite interesting - the warrants don't expire until Jan. 2019, the strike price is $13.30, and if BAC starts paying a dividend the strike price is adjusted down dollar-for-dollar so long as the dividend exceeds $0.01 per quarter. 

So why'd I make this exchange?  Well I've been following the big banks and TARP warrants for over a year now, but only recently has the price fallen to the point where I THINK the risk/reward favors the warrants.  Prior to this I preferred to be conservative and just own the regular stock.  Keep in mind this is a levered investment, so if BAC does well the warrants will be a home run, but if the economy falls off a cliff and BAC flounders I'll end up with egg on my face. 

Lastly, Bruce Berkowitz just gave a great interview in which he discusses BAC, which can be found here:

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