Units, Warrants, Commons - How they work
Updated: Jan 28
By now, you've realized that I said the floor is "around $10" and the reason for that is because of Units. When a $200m SPAC IPO's, it sells 20m units at $10/share. Those units are made up of 1 common share + fraction of a warrant.
After 45-52 days after the IPO, the units will split into separate trading of commons and warrants. Commons have a floor of about $9.80-10.10. Warrants are usually $.50-$2/warrant and serve as an option to buy the stock after certain conditions are met.
To subscribe to the 'can't lose' strategy of SPACs, stick to trading common shares because their floor is usually around $10/share. If you're looking for something more complex, keep reading.
I feel obligated to disclaim that if you decide to gamble on warrants and lose all your money, I feel your pain but don't blame it on me. I'm cautiously aggressive with my approach to SPAC warrants but you must understand, warrants can go to $0.
1. A warrant is the option to buy a share at a certain price. If I buy a $1 warrant today to buy a SPAC, I am paying for the option to buy the stock once it meets certain conditions. Common terms include a post-merger stock holding a share price of $18 for 20 days in a 30 day trading period. Sometimes they can add a 'set date' to start exercising warrants on top of the first condition.
The strike price is a set price of which you are able to convert the warrant into an actual share. Usually, the strike price is $11.50.
Warrant Price + Strike Price = Share Value
Example: I buy 100 warrants at $1 to purchase a SPAC. The SPAC announces a deal and the common shares go up to $20/share for 20 days. I can now convert my shares to the common stock and pay: $11.50 strike + $1/warrant = $12.50 for a common share. Basically, I just paid $12.50 for a $20/share.
2. Units can be deceiving because it consists of 1 common share + a fraction of a warrant. Some unit-warrants are ½ shares, some are ¼ shares. So basically if you buy 4 units with the ¼ warrants, when you separate them it'll convert 4 commons + 1 full warrant. Always look before buying and then multiply to figure out the 1:1 ratio.
Example: A $.50 warrant that represent ¼ share is really a $2/warrant for 1 share. $.50 * 4 = $2.
3. Another thing to mention is that you can trade a warrant like a stock. Warrants usually start in the pennies per share because they are significantly riskier than SPAC common shares. Unlike common shares that have a bottom of $10/share + interest, warrants can go to $0 and rip out the carpet from underneath you.
Many experienced traders prefer warrants because it allows them to front less money while giving them an option to get in the game at a later date. You also have the ability to sell the warrant like a stock.
Ex: If you have 1000 warrants at $1/share, thats $1k. If the warrants double to $2/share, you can sell your warrants for a 100% gain or you can hold them with the hopes of exercising at a later date.
Example: I buy warrants at $.20 each and the SPAC announces a Letter of Intent (LOI) with a company, the warrant will likely increase to above $.60 each. If the SPAC puts out more PR and the company has major upside, the warrants can hit $3+ super quickly. This entire time, I can sell my warrants the same way I sell common stocks. The only difference is with a warrant, you’re risking it all bc of the LOI falls through, the $3/warrant will drop back to pennies. You risk is all about when you buy the warrant.
4. Unit/Warrant tip: Pay attention to IPO dates for new SPACs. Look for big names in management and find a SPAC that you believe will target a valuable company and take care of your investment. Buy units or warrants immediately before they get any hype from PR and sit on them. Warrants can go to $0 but your odds at major gains go way up if you get in early and at a low price. Then sit back and have some patience.
5 Steps to Buying Units:
1. Download a quality brokerage that doesn't rhyme with Shrobinhood. The reason for this is because you need to have a brokerage with customer service that will answer your calls. Common brokerages include: Schwab, TD Ameritrade: Think or Swim, Interactive Brokers, E-Trade, Fidelity.
(If you want more info on which brokerage to choose, DM me on Twitter @SPACdaddy or elsewhere & I'll tell you which one is the move for you)
2. To find units of your favorite SPACs, search the ticker and click on the one that has a U .U or /U. For example, if you're looking units of Goldman Sachs Acquistion Corp (GSAH), it will look like GSAH/U. Warrants will look like GSAH/WS and the commons will be just GSAH.
3. Look up what fraction of the Warrant is in the Unit. Usually it'll be 1/2w to 1/5w. If you buy GSAH/U, which have 1/4w, every 4 units will yield you 4 commons and 1 warrant (4 units * 1/4w = 1w, 4 commons). It's very simple once you understand the math, don't overthink it.
Some more basic math: If you buy 4 shares of GSAH/U for $12/Unit, that means you are technically paying ~$8 for each warrant (SPAC common = $10, 1/4 Warrant = $2, so 4 units * 1/4w = 4 commons & 1 full warrant). Now technicalities don't always matter because sometimes theres a discount/arbitrage play to be made. A unit can be trading at $12.50/U while the common is at $12.20/share... so basically the fractional warrants just serve as the cherry on the cake.
4. Next up, find the SPAC you like during the greenshoe period and buy Units. After the 45-52 day greenshoe period is over, the SPAC will announce the "Separate trading of it's shares" aka splitting the units into commons and warrants. This is when Robinhooders flood the commons and jack up the price. Essentially, this is a way to get in before the madness.
5. The greenshoe is over and it's time to split your units. Call your brokerage & repeat these magical words verbatim:
"PLEASE MAKE A CONTRACT REQUEST TO THE RE-ORG GROUP TO SPLIT MY SPAC UNITS OF _ _ _ _ /U"
There you have it! Your units will split into commons and warrants in 1-2 business days and you've managed to buy SPAC shares before the Robinhood hype.
It's in the hands of the titans you invested with.