Options, Leaps, Warrants -
Is Now the Time?
May 23, 2006
updated May 25, 2006
Given the recent pullback in the metals, the gold indices, XAU
and HUI, and the mining stocks we would like to take a look at
some different ways to play the next upleg of the bull market.
First, let's take a view of where we have come from with a few
charts of gold, XAU and HUI. The long term uptrends are
clearly still in place and we feel that investors must be looking
for an entry point not an exit strategy at this particular time.
So, if you believe, as do we,
that this is merely a correction, albeit a violent one,
and we are heading back up, let's look at some different
Many investors might prefer to purchase shares in their favorite
mining stocks or the newly traded Gold ETF (Exchange Traded Fund),
symbol, GLD. Another excellent choice is to invest in one of
the gold mutual funds, i.e., World Precious Minerals Fund, (symbol:
UNWPX), part of the US Global Investors family of funds headed
up by Frank Holmes.
Investors looking for additional leverage and willing to assume
perhaps a higher level of risk might wish to consider investing
in call options, leaps or warrants. So let's take a closer look
at these alternatives.
Options and leaps actually are traded on the Chicago Board
of Trade with options usually having a time period of 30, 60,
90 days or so. These shorter term vehicles, while they offer
great upside leverage also come with much greater risk. The holders
of call options and leaps have the right, but not the obligation
to acquire the underlying common stock or indices at a specific
price and expiring on a specific date in the future. With these
short term options you must be right on with respect to your
timing of the markets and your particular choice of investment
vehicles on which to purchase these options.
Leaps offer a longer time horizon perhaps 1 or 2 years
but are only offered on a few mining companies, if any. So while
we would agree that leaps might represent a good opportunity
we find our choices are few and far between. The advantage of
leaps, that trade like options and also trade on the Chicago
Board of Trade, is with a 1 or 2 year time horizon, this recent
'pullback' would not leave us as investors totally devastated
as we should still have time remaining until the leaps expire.
Warrants are unfamiliar to most investors including many
newsletter writers, analysts and professional investors so allow
me to offer a simple explanation. A warrant is a financial
instrument that is issued by a company in connection with a financial
arrangement, loan, or IPO. Warrants are usually considered to
be an 'equity kicker' or 'sweetener', offered as an incentive
to get the deal done. While there are warrants which trade on
stocks other than mining and energy companies, warrants are much
more popular and plentiful in this sector of the market place.
The holder of the warrant has the right, but not the obligation
to acquire the underlying common stock at a specific price and
expiring on a specific date in the future. Some of the warrants
being issued have a life of up to 5 years.
Warrants trade differently than options and leaps. The warrants
have a CUSIP number, a legal identification, and are assigned
a symbol and will trade very much like the underlying common
stock of the company. While it is true that most of the warrants
trading on the mining and energy stocks are on Canadian companies
these orders are actually executed in the OTC market in the United
States making it easy for them to be purchased through
Each investor must consider their personal investment time horizons,
short-term or long-term in selecting which of these vehicles,
if any, to include in their portfolio.
Whether options, leaps or warrants should be included in your
investment portfolio is entirely up to you and your broker or
investment advisor. The ultimate risk with options, leaps or
warrants is exactly the same; if the underlying common stock
of the option, leap or warrant is trading below the exercise
price on the date of expiration, all of them will be worthless.
A total loss is never a good thing.
May 23, 2006 - updated May 25
Dudley Baker is the owner/editor
of Precious Metals Warrants, a market data service which provides
you with the details on all mining & energy companies with
warrants trading on the U.S. and Canadian Exchanges. As new warrants
are listed for trading they alert you via an e-mail blast. You
are provided with links to the companies' websites, links to quotes
and charts, tips for placing orders and much more. Precious Metals
Warrants do not make any specific recommendations in their
service. They do the work for you and provide you with the knowledge,
trading tips and the confidence in placing your orders.
For those investors
seeking more knowledge on warrants do visit the Learning
at Precious Metals Warrants, where you will find much more information
and examples to enhance your learning experience. You may also
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is not an investment advisor and any reference to specific securities
does not constitute a recommendation thereof. The opinions expressed
in this report are the express personal opinions of Dudley Baker.
Neither the information, nor the opinions expressed should be
construed as a solicitation to buy any securities mentioned in
this Service. Examples given are only intended to make investors
aware of the potential rewards of investing in Warrants. Investors
are recommended to obtain the advice of a qualified investment
advisor before entering into any transactions involving stocks