How SPAC Warrants Work

There are a lot of new investors interested in SPACs as various SPAC mergers start ramping up, and some of the most common questions is “what are warrants?” and “how does spac warrants work?” You’re going to hear a lot of talk about warrants here because a lot of us are purely SPAC warrant investors and do not really touch common stock.

What is a warrant?

A stock warrant gives you the right to purchase an amount of common stock by exercising your stock warrant at a certain strike price after merger.

A SPAC unit (issued at IPO by the SPAC) often contains a share and full or partial warrants, and sometimes rights.

Partial warrants are combined to make full warrants. There are various warrant conversion formulas depending on how the SPAC has structured them in their S-1 form. Before buying it’s important to research the warrant conversion rate, because that greatly affects the value of the warrant relative to the commons price.

Why would you buy warrants instead of common stock? What are the downsides?

The higher return possibilities (which come with higher risks) and ability to potentially purchase more shares later for less money. The risk is that you can lose every penny if the merger fails and the SPAC is liquidated. Warrants are far more volatile than the shares, but are also more likely to double or triple in value than commons.

Let’s use a theoretical example:

  • Option A: All Warrants – You buy $2000 worth of 1:1 conversion ratio warrants at $2 (1000 warrants) with a strike price of $11.50. The merger takes off and by redemption date after merger, the common stock has risen to $20. At $20 common – $11.50 strike price, your warrant is intrinsically worth $8.50 each. That’s 325% return on your initial investment! You can sell it at market rate, or you can exercise for shares if you want to hold commons. Your $2000 investment became worth ~$8500.
  • Option B: All Commons – You buy $2000 worth of common shares at, say, $11 (182 shares). The stock rises to $20. That’s an 82% return. Your $2000 became $3640 – which is fantastic, but nowhere near as high as your return on option A.

The downside is if the merger falls through and the SPAC liquidates, warrant investors lose everything. $0. On the other hand, if you bought commons at $11, you get most of your money back (liquidation is $10 + interest from the trust fund, so usually something in the 10.30 a share range).

So a risk reward matrix of the scenario above

Upside Value: Merger Succeeds, Commons to $20Downside Value: Merger Fails, Trust fund liquidates at 10.30 a share)
Option A: $2000 in warrants @ $2$8500 ($6500 gain or +325%)$0 ($2000 loss or -100%)
Option B: $2000 in commons @ $11$3640 ($1640 gain or +82%)$1874.60 ($125.40 loss or -6.27%)

Some very important notes on the above scenario:

– This is just an example to highlight why risk-taking people buy warrants over stock. Do not expect these kinds of returns for most SPACs and most warrants. SPACs making it up to $20 are rare.

– Warrant prices usually do not perfectly track the stock prices. If the warrants are undervalued relative to intrinsic value, you may not be able to capture these gains unless you actually exercise the warrants.

– Warrant redemptions dilute the common shares, leading to a drop in price in most cases.

How likely is it the merger fails and I lose all my money?

Well, historically I have read that almost 20% of SPACs failed to find a target and liquidated. Not sure if that will continue going forward assuming SPACs continue to become more serious and legitimate avenues for private companies to go public.

One thing that warrant holders can take heart in about their downside risk: the SPAC sponsors have lots of incentive to complete the merger, or they lose much of their initial investment too. Even if the initial merger target falls through, they have incentive to try to find a replacement target.

What ratios of warrants exist?

  • 1 warrant : 1 stock @ $11.5 strike
  • 4 warrants : 3 stock @ $11.50 strike each
  • 2 warrants : 1 stock @ $11.50 strike

*note: PSTH has a strike of $23 because of the 2x scaling of the SPAC. The rest of the SPACs can be exercised at $11.50 per share.

Each SPAC has a different ratio, so it is very important to verify which you are buying before you buy. Most of the upcoming mergers (SHLL, LCA, OPES, SPAQ, DPHC, HCAC, FMCI, CCH, INSU, etc.) are 1:1 warrants.


4:3 – GRAF/Velodyne Lidar. Note: many sites erroneously list this as 2:1, and has led to GRAF-WTs being artificially undervalued.

2:1 – JFK/Diginex, ORSN/UCommune, KBLM/CannBioRx

Do warrants automatically convert to the new company’s ticker on merger?

Yes. Just like the commons.

How long do warrants last?

It depends. Optional redemption usually opens about 30 days after merger. In theory you have up to five years to exercise your warrants. In practice, most SPACs have early redemption clauses to where if the stock holds above a certain price for a certain number of days, they can make you exercise the warrants within 30 days. Often this is like $18 or something, so if your SPAC is slower to rise, you have more time to hold your warrants. In the case of a rare SPAC that pumps above that early redemption price at merger, you might have only 60 days total post-merger before you must exercise. If you don’t exercise/sell by either the expiration date or the end date of the early redemption call, your warrants expire worthless. You must pay attention to warrants for early redemption calls so this doesn’t happen.

Do I have to hold through merger or until redemption? Do I have to exercise them?

You can sell the warrants at market rate exactly like stock at any time. They are very liquid, which is part of their appeal.

What if I don’t have $11.50 per share and cash redemption is called?

Your options are to sell the warrants at market price, or sell some of the warrants to come up with the strike price money, and then exercise the remaining warrants to turn those into common stock.

What is cashless redemption?

In rare cases, a merger partner may offer cashless conversion, where your warrants automatically convert to equivalent value in stock. This has benefits and negatives for both the warrant holder and the company:

Cashless ConversionProCon
Warrant HolderYou don’t have to come up with strike price cash (potentially incurring cap gains) to exercise your shares. If you want to hold your shares long-term you can potentially get a lower cap gains rate as a result.If cashless conversion is declared, the warrants may not track the stock price nearly as closely, potentially reducing your returns. Cash redemption potentially gives you more profits than cashless.
CompanyCashless conversion means less share dilution. When warrants are exercised en masse (say in the case of NKLA), usually the commons shares drop due to the influx of new shareholders. Cashless conversion means fewer shares are issued vs. cash conversion so less dilution.The strike price is extra revenue for the company. By going cashless, they still get share dilution and no extra revenue for it.

I don’t see warrants when I search for them. Why?

Some brokerages do not allow warrants trading. For instance, Robinhood. Apparently too many investors did not know what they were buying and got in trouble as a result, so they took away that privilege. Most full service investment brokers (E-Trade, Schwab, Fidelity) do offer it. If you are interested in trading warrants, you might need to change your brokerage. In fact, the fact that warrants are not available on platforms like Robinhood can cause a disconnect in value when the SPAC pumps and warrants don’t keep up. This is a potential opportunity for warrant buyers, as the warrants have room to grow to catch up to their “real value.”

If your brokerage does offer warrants, and you can’t find a specific one, try a different search. Sometimes they list under (ticker)+, (ticker).WT, (ticker)-WT, (ticker).WS, (ticker)W, (ticker)/WS, etc. It’s going to depend on how your brokerage lists them.

How do I exercise warrants? How much does it cost?

You will have to ask your broker these questions. Fees will vary by brokerage, and you need to have your brokerage exercise them for you.

What happens if the commons stock falls below strike price post-merger?

Unfortunately, this is a very common outcome for the majority of SPACs. Because of the 5 year time frame, your warrants should maintain some speculative value. They will be overvalued, but the more chance the market sees the stock bouncing back to positive values, the more value should maintain in the warrants. You really want to avoid this situation if possible, so be careful about holding through merger when you might hit highs right before it.

Tim Rolle
Tim Rolle

Investor of 6 years and Managing Editor of Money Midnight, a news outlet focused on highly profitable investment ideas and bold underground research.

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