I want to bounce this story off of you guys and see if I am missing something.
I have been watching a stock for awhile and felt that it was reliable enough to do CSPs on. I made some fairly decent money for awhile. Then it dropped like Galileo’s rocks, almost in one day. Stock price is currently $1.06. I got assigned at $2, but I didn’t have that much in it so it didn’t sting too badly.
So I went about trying to figure out what happened. Apparently the company decided to expand its business into another sector but needed some cash to do it. So they announced that they were going to sell a bunch of warrants six months from now (lead time is apparently an SEC requirement), executable at $1.90. At that time the stock was above $2 so it made sense.
I am sure people started dumping the stock because they feared that more shares in the market would dilute the per-share value.
But the stock is now at $1.06. Why? Those warrants are worthless below $1.90. No one will buy a warrant for the right to buy the stock at a higher price than you can on the open market. There won’t be any stock dilution. Even if the stock price was above $2 there wouldn’t be any dilution for six months.
So why did traders freak out? Shouldn’t the stock be hovering around $2?
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>The stock is currently trading at $1.06 because the market believes that there is a high likelihood of further dilution in the future, given that the company has announced its intention to sell more warrants. The market may also be worried about the company’s ability to successfully execute its expansion plans and generate enough revenue to justify the additional shares outstanding.
“Dilution limiting progress forward isn’t really dilution. In fact, dilution is good for them as they can use that money for expansion” op probably
The chance of dilution should theoretically bring down the expected value I guess.