- In 2011, American International Group issued publicly-traded warrants that expire in January 19, 2021, with an exercise price of $45 per share.
- These warrants currently traded significantly higher than the company’s call options with similar terms.
- The warrant holders could swap out of the warrants into the call options for the same risk profile but better upsides.
Investment Thesis
Besides common stock, American International Group, Inc. also has publicly-traded warrants outstanding with a strike price at $45 and the expiration date on January 19, 2021. The warrants traded at $1.40 per share as of November 24, 2020, while AIG call options with similar terms ($45 strike price and expiration date on January 15, 2021) traded just at $0.70 per share.
At these price levels, the warrant holders should sell the warrants and roll the proceeds into the call options to pick up twice as many underlying shares. If AIG stock price indeed goes above $45 per share by January 15th next year, the prices of warrant and call option should converge but call option can be exercisable into twice as many AIG shares. If AIG stock price fails to hit $45, both warrant and call option will expire worthlessly. So, by doing this switch trade, call option will have twice the upside while the downside is the same as warrant.
