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Lesson 6. Stock Derivatives > Options - Pg. 29

Stock Derivatives 29 Let's say that when you purchased those 10 initial shares and received the warrants, you were satisfied because you really only wanted 10 shares to begin with. You figured the warrants were nice but relatively useless, right? No. As in the subscription rights example, you can sell or otherwise dispose of warrants however you see fit. Therefore, if the price of XYZ Company stock rises to $13 per share, you have 10 warrants to use for purchasing that stock at $11 per share. I'm an investor who wants to purchase XYZ Company stock, so you offer to sell me your warrants for $1 each. I use your warrants to purchase XYZ Company stock at $11 per share, and I still save $10 ($11 × 10 = 110 + $10 = $120, versus $13 × 10 = $130). You've just made $10 by selling me something you didn't want to begin with, and XYX Company has attracted a new investor. Every- body's happy. More on Warrants Many investors buy and sell warrants, completely ignoring the underlying stock, because oftentimes more money can be made from the warrant transactions. For example, let's say you bought those 10 warrants from me at $1 each. Instead of using them to buy stock, you hold on to them and wait until the price of XYZ Company stock climbs to $14 per share. You then find another investor who is willing to pay $2 per warrant. The advantage to the buyer is that he or she acquires the right to buy XYZ Company shares at the bargain price of $11 each. The buyer will still save $10 in the transaction ($2 × 10 warrants = $20 and $11 × 10 shares = $110; $20 + $110 = $130, versus $140 to purchase 10 shares at $14). The investor has saved money, and you have made $10 from your initial $10 investment, effectively giving you a 100-percent profit. Of course, if the price of XYZ Company stock never rises above $11 per share, you've just bought a dog with fleas. Welcome to the wonderful world of investing. Also, it should be noted that XYZ Company is not issuing warrants for the sake of being nice. As