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Warrants Basics – Selecting A Warrant
Education | 07 June 2011
By: jason.liew
Articles (66) Profile

By Macquarie Capital Securities (Singapore) Pte. Limited

When choosing a warrant, we suggest that investors may want to take the following steps into their consideration:

Take a view on the underlying share or index
To choose a warrant you should first look at the nature and performance of the underlying shares. This will assist in enabling you to make an informed decision about the anticipated movement of the stock. You should also set a target price for the stock, as that will help in your decision of which warrant to choose.

Timeframe
Your selection will be further narrowed by the time frame of your view. Generally you may try to select a warrant that matches the intended time frame for your trade. Shorter dated warrants will generally provide more gearing, but these warrants will tend to decay at a faster rate. Usually, longer dated warrants tend to be less risky but will require a greater outlay and are generally less responsive to price changes.

Effective gearing
Next you may look for a warrant with an appropriate effective gearing level. The two things to consider are the strength of your view and your appetite for risk. The higher the effective gearing, the greater your exposure and the higher your returns or losses will generally be.

Implied volatility
Lastly, you should examine closely the warrant’s Implied Volatility. You should consider it against other similar warrants and against the historical volatility of the underlying share. Generally speaking, the higher the Implied Volatility the higher the relative price of the warrant, holding all other factors constant.

In addition to the four steps above, it is important to note that every warrant issuer has a designated market maker that is responsible for providing liquidity for the warrant. It is important that you choose a warrant issuer that you are confident will provide you with a fair price and sufficient liquidity for you to enter and exit your trades.

Warrant Basics
1. What Are Warrants?
2. Why Trade Warrants?
3. Selecting A Warrant
4. Pricing Variables

Disclaimer


The content of this article is reproduced with permission from Macquarie Capital Securities (Singapore) Pte. Limited (Registration No 198702912C) (“MCSSPL”), holder of a capital markets services licence under the Securities and Futures Act, Chapter 289 of Singapore. No part of this article may be copied, either in whole or in part, or distributed to any other person without permission from MCSSPL.

This article is not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject SharesInv.com, MCSSPL or their respective affiliates to any registration or licensing requirement.

The information contained in this article is obtained from sources believed to be reliable and accurate as at the date of publication. Opinions, estimates and other information contained herein may be changed or withdrawn without notice. Any prices and quotes published in this article are purely indicative and for information purposes only. Indicative prices and quotes shown in this article may vary significantly from indicative prices or quotes available from other sources.

The information contained in this article is for general information only and while SharesInv.com and MCSSPL have taken reasonable care to ensure the accuracy and completeness of the information provided, it will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information.

Investment products are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not indicative of their future performance.

This Newsletter is for general circulation only and is not an offer or solicitation to buy or sell, nor financial advice or recommendation for any investment product. It does not address the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies.

Prior to buying or selling a warrant, investors should receive appropriate training on warrants characteristics from their broker, from the Singapore Exchange or from one of the issuers. SharesInv.com is not a broker-dealer. SharesInv.com is not affiliated with MCSSPL or their affiliates and does not pay or receive any fee for the reproduction of this article. Investors should exercise judgment and perform adequate due-diligence prior to making any investment.

Macquarie Bank Limited (ABN 46 008 583 542) (“MBL”) is the Issuer of the Macquarie warrants in Singapore and appoints MCSSPL as the designated market maker of the warrants. MBL is regulated as an authorised deposit taking institution by the Australian Prudential Regulation Authority. MBL, acting through its Singapore branch is authorised and licensed by the Monetary Authority of Singapore to carry on wholesale banking business in Singapore pursuant to the Banking Act, Chapter 19 of Singapore and therefore is subject to the supervision of the Monetary Authority of Singapore. MCSSPL is not an authorised deposit taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia), and MCSSPL’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of MCSSPL.

MBL, MCSSPL and their affiliates may be involved in financial, investment and professional activities which may on occasion give rise to interests or a conflict of interests in respect of the investment products. MBL, MCSSPL and their affiliates make no representation nor can it give any assurance as to the liquidity in the trading of warrants as the designated market maker may be the only person quoting prices in the warrants.

You should visit www.warrants.com.sg for more information on warrants and detailed disclaimers/risk disclosures of MCSSPL.


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