silly question: what happens if you change the "stock price" input for your black-scholes model to $8 or $6? because current SPAC prices pre-deal-close are kinda "nonsense" in that they include an embedded $10 put (redemption) and the vast majority of deals have traded lower after closing. TIA
Great question. At $8 underlying and 50% implied vol, I'm getting to ~$2.20 fair value using Monte Carlo. At $6 underlying and 50% implied vol I'm getting a fair value around $1.30. The performance of recent deSPACs has been horrible so it's certainly a factor suppressing warrant prices. It might be possible to short common or buy puts to hedge delta of the underlying
Btw I'm a longtime reader of yours going back to the days when you wrote about Vegas poker trips. Honored to have your insights here! Cheers
silly question: what happens if you change the "stock price" input for your black-scholes model to $8 or $6? because current SPAC prices pre-deal-close are kinda "nonsense" in that they include an embedded $10 put (redemption) and the vast majority of deals have traded lower after closing. TIA
Great question. At $8 underlying and 50% implied vol, I'm getting to ~$2.20 fair value using Monte Carlo. At $6 underlying and 50% implied vol I'm getting a fair value around $1.30. The performance of recent deSPACs has been horrible so it's certainly a factor suppressing warrant prices. It might be possible to short common or buy puts to hedge delta of the underlying
Btw I'm a longtime reader of yours going back to the days when you wrote about Vegas poker trips. Honored to have your insights here! Cheers
and i'm guessing the implied short $18 calls don't decline as much...
the vegas poker trip reports were the good old days... i still read them and reminisce on occasion...
Yes, the underlying should be $8, not $10. That's about the average real economic value post-merger.