The Trouble Asset Relief Program (TARP) bank warrants is an interesting way to play some of the US banks and financials. Although more complicated and sophisticated than owning a common share, you have to approach them like a really long-term call option. Basically, you have the option to purchase one share at the strike price for each warrant held. Warrants are risky investments because if the share price doesn’t climb above the strike price before the expiration date, the warrant expires worthless. A simple Google search will lead you to a lot of really smart people that have broken down the math and the different probabilities. I highly suggest you really do your research because there are a lot of variables and inputs that influence the movement of these warrants.
The warrants that I am following at the moment are Bank of America Warrant Class A, Class B and AIG. BAC Class A is more conservative and less risky with a strike price of $13.30 and an expiration date of January 16th 2019. If you are extremely bullish on BAC, the Class B is certainly more risky with a strike price of $30.79 and expires on October 28th 2018. What’s also very interesting, that you don’t find in other warrants, is that the strike price is adjusted downward when dividends are raised after a certain threshold. That’s pretty sweet considering the banks are starting to raise their dividends.
If you really want to get legal, I will refer you to the pleasure reading section:
The banks issued warrants to the U.S. Treasury in exchange for bailout money. Then the Treasury sold the warrants to the public in an auction process.
Below is a table summarizing the warrants.