Pennaluna Prospector Newsletter
- Coeur d'Alene, Idaho - August 2010
Canadian mining stock warrants,
T+3, and your money
Timothy Major and Tom Wobker
Aug 5, 2010
Although the precious metals market is
taking a breather, a number of U.S. investors remain fired up
with enthusiasm for trading Canadian mining stock warrants.
This is not surprising when you consider
that these warrants are so loaded with leverage to the market
that their returns sometimes rocket up into the 1,000% range.
Also spurring interest are relatively new financial services
like PreciousMetalsWarrants,
which have turned a spotlight on the unusual profit potential
in Canadian warrants.
[Note: This discussion concerns
trading Canadian warrants... as contrasted with exercising them
and purchasing the underlying shares. For regulatory reasons,
U.S. residents generally aren't allowed to exercise these warrants,
although they're free to buy and sell them on the Canadian exchanges.]
While Canadian mining stock warrants
can present eye-popping opportunities, like other high-potential
investments they also carry their share of big risks.
One particular hazard that is easy to
sidestep -- but can be disastrous to overlook -- arises from
the very nature of warrants themselves.
The clock is always ticking
Unlike stocks, which theoretically can
survive forever, warrants have a limited life because they're
created with expiration dates. They're born to die.
A warrant gives you the right to buy
the underlying stock at a specific price for a specific time
period that ends when the warrant terminates (this is sometimes
called expiry). Depending on when you buy the warrant, expiry
could be years, months, or only days away.
When their life ends at expiry, warrants
become instantly worthless. Hence they aren't investments to
tuck away and forget. You need to keep an eye on them or you
can lose money - all the money, if they expire before you sell
them.
Now, suggesting you sell your warrants
before they turn worthless may strike you as pretty basic investing
advice. But we've seen it happen. As we'll explain, the calendar
and trade settlement process sometimes conspire to trip up folks
on this simple tactic, and they limp away with a loss.
If you trade Canadian warrants, Rule
Number One is this: remember that the clock is always ticking.
Contrary to the old Rolling Stones song, time is not on your
side.
Unless the underlying stock is rising
nicely, a warrant's "time value" - the worth of its
continuing exposure to the movement of the underlying security
- generally declines as expiry draws nearer. And the value of
every warrant always plunges to zero when it expires.
Remember your Big Three Dates
One way protect yourself from an absolute
wipe out is to keep in mind the Big Three Dates for the
warrants you buy:
- Expiration date
- Last possible settlement date
- Last possible trade date
There are good reasons to take note of
these days.
First, recognize that order execution
is only one step in your securities transaction. The trade isn't
actually a done deal until delivery and payment take place. Even
in the electronic age, this requires some time.
The exchange of warrants or other securities
for payment is called settlement. It generally occurs a few days
after the trade, on "settlement date". The wait allows
for clearing, trade matching, and other post-trade activity that
goes on behind the scenes, invisible to the customer.
At settlement, the seller's broker delivers
the security, the buyer's broker gives payment, and the transaction
closes. If the seller can't make good delivery, the trade can't
be completed. After a warrant has expired, the seller obviously
has nothing left to deliver.
T+3 and how it works
In Canada and the US, with certain exceptions
for financial institutions, settlement takes place three business
days after an order is executed. Business days are Monday through
Friday, except holidays when the markets are closed.
This settlement cycle is called T+3
-- short for "trade date plus three business days".
It's especially critical in the case of warrants, thanks to the
ticking clock and the death sentence each carries.
The T+3 count starts on the first business
day after the trade. It ends on the third business day, at which
time the trade settles. Thus: Trade Date + Business Day 1
+ Business Day 2 + Business Day 3 = Settlement Date.
When it comes to Canadian mining stock
warrants, T+3 is not mere securities trivia. More than one investor
has overlooked an expiry date, waited too long to sell... and
taken a painful hit when T+3 blindsided him out of the blue.
So it's critical to be sure the warrant
you want to sell will remain alive on settlement date. And the
best way to do that is to know exactly the last day you'll be
able to sell and still give good delivery.
Your Last Possible Trade Date
As a result of T+3, the Last Possible
Trade Date will be three business days before the warrant expires.
(Notice we said business days.)
Finding the Last Possible Trade Date
is generally easy. You start with the Expiration Date, because:
Expiration Date = Last Possible Settlement Date (if it's
a business day... if not, Last Possible Settlement Date becomes
the next previous business day).
You count backward from the Last Possible
Settlement Date. Thus: Last Possible Settlement Date = Business
Day 3 - Business Day 2 - Business Day 1 = Last Possible Trade
Date.
For example, say your warrant expires
on Friday, a business day. That becomes the Last Possible Settlement
Date and also T+3. Thursday, the day before, is T+2. Wednesday
is T+1. So Tuesday would be your Last Possible Trade Date. If
you don't sell by then, it's too late.
Sometimes it's trickier
But it's not always so straightforward.
Here's a true story from last winter, when T+3 ambushed some
folks who owned a popular gold mining stock warrant trading on
the Toronto Stock Exchange.
These warrants had an expiration date
of February 17. That was Wednesday, a business day, and thus
also the Last Possible Settlement Date.
Surprisingly, however, the last day owners
could sell and still give good delivery at settlement was Thursday,
February 11. This caught some people flatfooted because it was
fully six calendar days before expiry. At first glance, this
seems way too early to be the Last Possible Trade Date. But those
who tried to sell after that quickly learned otherwise.
Here's how the count went.
- Wednesday the 17th was Expiration
Date ... and since it was a business day it also became T+3,
the Last Possible Settlement Date... you count
backwards from there
- Tuesday the 16th was T+2
- Monday the 15th was a market holiday
(Family Day in Canada) ... so it wasn't a business day and it
was not counted as T+1
- Sunday and Saturday, the 14th and 13th,
aren't business days, so they weren't counted either
- Friday the 12th, the next business day,
was T+1
- Thursday the 11th was a business day
and thus became T ... and the Last Possible Trade Date
After the 11th, sellers couldn't deliver
good warrants at settlement. They were left with nothing but
a worthless security, a tax loss, and a pricey lesson from the
school of hard knocks.
Our advice
Here's our recommendation. If and when
you trade Canadian mining stock warrants -- or any warrants,
for that matter -- don't play chicken with expiry. Figure out
your Big Three Dates at least a couple of months before expiration.
Double check to be certain you've used
actual business days to calculate last possible trade and settlement
dates. Watch for Canadian market holidays, because they aren't
always the same as in the States. After you've found those dates,
write them down and keep an eye on them.
Finally, leave yourself a little breathing
room; don't wait until the very last minute to trade.
For more information about Canadian stock
warrants, try these sites:
http://www.preciousmetalswarrants.com
http://canadianwarrants.com/index.html
If you have an insatiable desire to learn
more about T+3, see these pages on the SEC website:
http://www.sec.gov/answers/tplus3.htm
http://www.sec.gov/investor/pubs/tplus3.htm
###
 The authors:
Timothy Major, an Idaho native, holds a degree in commerce
from the University of the Witwatersrand in Johannesburg, South
Africa. For 14 years he has been a broker with Pennaluna &
Company, a FINRA broker-dealer and market maker with its main
office in Coeur d'Alene, Idaho.
Tom Wobker holds degrees in journalism
and law and is a principal with the firm. Founded in 1926, Pennaluna
trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB
and Pink Sheets.
phone 800-535-5329
or visit www.pennaluna.com
or www.penntrade.com
email: help@penntrade.com
321gold Ltd
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