As part of Buffett's investment in the beleaguered bank, he received warrants that allow him to buy 700 million Bank of America shares at a strike price of about $7.14 a share. After the news of Buffett's investment, shares of BAC skyrocketed to $8.80 per share leading many to declare that Buffett had pocketed a cool $1.4 billion in a day. Since the initial pop, shares of BAC have plummeted as many fear the bank will need to be recapitalized which will dilute existing shareholders.
However, it should be noted that Buffett has 10 years to exercise his options. It should also be noted that the core of Buffett's investment was actually preferred shares, meaning he most likely is unconcerned with day-to-day volatility. Berkshire purchased $5 billion of preferred stock that pays a six percent annual dividend.
It is important to watch when Buffett may decide to exercise his warrants because it will be highly dilutive to existing BAC shareholders. If Buffett exercises 700,000,000 warrants, then Bank of America shareholders will experience a roughly 7 percent share dilution.