Professor Elam

THE TREASURY COULD NET $1 billion to $1.2 billion from the sale today of warrants on shares of JPMorgan Chase (ticker: JPM) that it received as part of the government's TARP investment in the New York bank, derivative traders tell Barron's.

The 88.4 million warrants, which carry a strike price of $42.42 and a maturity date in nine years on Oct. 29, 2018, could fetch about $11 to $14 per warrant depending on the assumptions that investors plug into their Black/Scholes option pricing models.

As a matter of fact the warrants fetched $10.75 each for a total of $936.1 Million.  I included the above quote as it mentions the expiration date, ten years it the future, good thing I would say. 

Our experience is that selling warrants is usually a sign of a distressed seller, for once though the US Government may have caught the top of a market. Even the monthly chart reveals the highest price ever at DOW 14,000 when markets were giddy for banks was $50 for JPM. Option students will recognize that the $10.75 premium on a strike price of $42.42 means the stock has to rise to , ahem, a never before seen $53.17. Notably J P Morgan declined to purchase these warrants.  The 88 M warrants will trade in the market like any option as a proxy for the future of the stock price. 

But the weekly chart shows JPM turning down, not up. Indeed all the banks have weakened with the XLF weaker and CITI dropping below $4. Volume has been smaller at bottom. It is a real sociomomic feat for the fears of last fall to turn to delight. Are investors saliv;ating over the  prospect of buying options on a business in the most troubled sector of America at a never before seen price?  Apparently so….