Is That Warranted?
(WARNING: If you don't play the Hollywood Stock Exchange (and why not?) this will probably make no sense to you.)
The HSX Oscar Warrants are out. Now at first glance you might think you should treat them like the weekend openers and just invest based upon what you think the results will be -- after all, you're basically betting on who'll win and lose, right?
Not quite.
The first thing you should note is that the price of the warrants is ultimately a zero-sum game -- the total cost of all five warrants was H$25 at IPO and will be the same at cash-out.
If you're holding everything correctly and invested at IPO prices, you stand to make H$400,000 per category.
{10,000*1(H$25-H$5)}+{-10,000*4(H$0-H$5)}=H$400,000
(The -10,000 denotes a short.)
Of course, you only have a 20% chance of making the right investment in any given category, and the odds of guessing all eight correctly are extremely slim. Even if you fancy yourself an expert handicapper, all it takes is a few upsets to ruin your day. If you're right, it'll give you a good return on investment, but it's exceedingly risky and in the meantime many of the warrants will be going up in price, eating into your port.
There is, however, a sure-fire strategy you can use -- one that can guarantee you a profit with as much certainty as a Starbond that's one day from adjusting. We've already established that at IPO and cash-out, all the warrants in a category have a sum-value of H$25. Now if the market behaved completely rationally, that would remain true for any point between IPO and cash-out -- if A4LR3 goes up a dollar, the other four should lose a collective dollar. But the market isn't rational. As I write, the total value for the Best Picture warrants is H$27.60 -- in HSX parlance, it's bra or reverse arbitrage, a guaranteed profit if you short it.
The problem is, there's no reason to think the price will correct itself in the near future, and the return-on-investment for holding all five short until delist is miniscule. To ensure the best return, you really have to wait until a day or so before the Oscars.
Let's imagine a hypothetical situation where A4LR3 and A4MYS are both at H$20 on the morning of the awards. If you short them both, the worst that can happen is that one wins -- you lose H$50,000 on it, but you earn H$200,000 on the other, giving you a net profit of H$150,000.
{-10,000*1(H$25-H$20)}+{-10,000*1(H$0-H$20)}=H$150,000
On the other hand, if both of them lose, you end up with a H$400,000 profit.
{-10,000*1(H$0-H$20)}+(-10,000*1(H$0-H$20)}=H$400,000
Between now and the Oscars you can make some money by playing the price shifts, but when it comes time to take your final position on the warrants, check to see if there are any categories with guaranteed profits instead of investing in what you think will win.