Bulls on Hertz Global Holdings should consider the rental car company’s unusual and attractively priced warrants, which offer an alternative to Hertz common stock (ticker: HTZ).
First, some details on Hertz Global Holdings (Ticker: HTZWW) warrants. They amount to long-term call options on the stock and are trading around $10.50 while the stock is changing hands at $18.77. The warrants have an exercise price of $13.80, meaning investors can buy Hertz shares for $13.80 until the 2051 maturity date.
One way to play Hertz is to buy two warrants instead of one share. The warrants should provide most of the stock’s gains. On Friday, the stock was up 42 cents and the warrants were up 33 cents.
It doesn’t pay to exercise the warrants now because their intrinsic value ($18.77 minus $13.80) is about $5 below the price of the warrants.
But the appeal of the warrants lies in their extremely long term of 28 years. This means that the warrants do not expire for a long time, unlike regular stock options, which typically expire in months or days. While the warrants will move up and down with the stock, they should hold their value as long as Hertz remains solvent.
Advertisement – Scroll to Continue.
Barrons started writing about Hertz warrants in 2021, before the company made its first stock offering, when the warrants were super cheap and at times traded below their intrinsic value. We also mentioned them in a recent optimistic article about Hertz.
There are a limited number of publicly traded warrants, including those from Chesapeake Energy (CHK) and Occidental Petroleum (OXY), but they have terms of less than five years. The Hertz warrants were created when the company emerged from bankruptcy in 2021 and the company issued them to shareholders of the old, pre-bankrupt Hertz.
One way professionals price options is based on implied volatility. Not surprisingly, options on volatile stocks like Tesla are more expensive than those on more stable stocks like Procter & Gamble
.
Implied volatility captures expectations of future price movements for a stock. The
S&P500
Advertisement – Scroll to Continue.
The implied volatility is around 20%, while Tesla options imply a volatility assumption of around 60% versus P&G’s 15%.
The implied volatility of the Hertz Warrants is essentially less than zero. Bloomberg data shows that with an implied volatility of one, the options would trade at around $13.
There are about 83 million Hertz warrants outstanding and they are liquid with an average daily volume of 300,000 versus about three million shares for the stock.
Advertisement – Scroll to Continue.
There are two nice things about the warrants. They protect investors when Hertz starts paying dividends by adjusting the strike price downwards. And if Hertz is acquired, warrant holders would get what’s known as Black/Scholes protection, meaning they would receive a premium over intrinsic value.
The warrants appear to be a better bet than Hertz’s pricey stock options, which have an implied volatility of around 40%.
Warrants, like options, aren’t for everyone, but in Hertz’s case, they offer a nice and relatively safe alternative to stocks.
Write to Andrew Bary at [email protected]
