OREANDA-NEWS. Yesterday, turnover of Structured Warrants reached S$53 million. This has brought average daily Structured Warrant turnover for the May month to date to S$32 million which compared to S$23 million in April. The month of April saw total trade value of S$478 million for Structured Warrants listed in Singapore, the highest it had been in the last 26 months. Structured Warrants allow traders to leverage their views, be it bullish or bearish, and participate in the price performance of the underlying.

Most Active Index Structured Warrants in May-to-date

The two most active Structured Warrants in the 2016 month thus far have been based on the Hang Seng Index (HSI) with strike prices relatively close to the 10 day moving average of the HSI at 21,120. The 21,200 Call option expires on 29 September 2016 and the 20,000 Put option expires on 29 June 2016. 

Call Warrants cater to bullish expectations, allowing investors to take a “long”  position in the underlying asset.  The other type of Warrant, Put Warrants allow investors to take bearish views and profit from a fall in the stock price.

Most Active Index Warrants in Month to date

Stock Code

Call/Put

Expiry Date

Strike level

May 2016 Trade Value (S$)

HSI 21200 UB ECW160929

BSNW

C

29-Sep-16

21200

      33,276,875.20

HSI 20000 MB EPW160629

BOCW

P

29-Jun-16

20000

      23,881,907.60

HSI 20000 MB EPW160530

BRMW

P

30-May-16

20000

      23,723,886.50

HSI 20600 MB ECW160530

BROW

C

30-May-16

20600

      23,317,167.20

HSCEI 9400 UB ECW160929

BSRW

C

29-Sep-16

9400

      20,678,064.80

Source: SGX (data as of 17 May 2016)

Most Active Structured Warrants on Singapore Stocks in May-to-date

The most active Structured Warrants in the month to date that track underlying stocks have been associated with the three Singapore banks. In the year to date, the three banks have all declined with the average decline in total return at -5.5%. This has trimmed their average five year total return to 15.2%. Over the past six months,the three banks have been swinging more than the Straits Times Index, with the average six month at 1.06. The respective 30 day historical volatilities for the three stocks  have been 18.7% for United Overseas Bank, 15.3% for DBS Group Holdings and 8.8% for Oversea-Chinese Banking Corp.

Most Active Stock Warrants in Month to date

Stock Code

Call/Put

Expiry Date

Strike level

May 2016 Trade Value (S$)

DBS MB ECW160711

BPJW

C

11-Jul-16

14.8

        5,616,256.90

UOB MB ECW160705

BNKW

C

5-Jul-16

18.9

        1,923,246.70

DBS MB EPW161003

BNOW

P

3-Oct-16

15

        1,754,608.70

DBS MB ECW160705

BNMW

C

5-Jul-16

16

        1,586,761.30

OCBC BK MB ECW161004

BNPW

C

4-Oct-16

8.2

        1,477,313.00

Source: SGX (data as of 17 May 2016)

Basic Workings of the HSI 21,200 Call Warrant [BSNW]

For Structured Warrants listed on Singapore Exchange, Structured Warrant issuers will automatically exercise the Warrants and pay the Structured Warrant-holder the settlement amount (if any) in cash, which is usually the difference between the closing level at expiry and the strike level (if the Structured Warrant expired in-the-money). Investors can refer to the respective issuers’ expiry notice announcements on the last trading day of the individual Warrants. 

Index Warrants expiry dates are typically matched to the expiry date of the relevant futures contract. This is done because the issuer will use the futures contract to hedge the Structured Warrants, then both the Structured Warrants and futures can be settled based on the same closing value in the futures.

On Wednesday morning, the HSI 21,200 Call Warrant was trading at 7.9 cents per Warrant. This was down 6.0% from the Tuesday close price of 8.4 cents per Warrant. The conversion ratio for the HSI 21,200 Call Warrant is 1,000 Warrants per index unit. Hence,to qualify for 100 index units at expiry, investors would have to purchase 100,000 Structured Warrants. At a price of 7.9 cents per Warrant, the purchase price of 100,000 Structured Warrants would be S$7,900.

If, hypothetically, the HSI 21,200 Call Warrant expired on 29 September 2016 when the underlying HSI was trading below 21,200, the intrinsic value of the Warrants purchased would be zero, and loss on the position would be the initial premium of S$7,900 paid plus the transaction cost.

If, hypothetically, the HSI 21,200 Call Warrant expired on 29 September 2016 with the underlying HSI futures, at say 22,200, the Call Warrant would expire with intrinsic value (in the money). The intrinsic value would amount to the difference between the hypothetical underlying price at expiry and the strike price which would then be converted in Singapore Dollars (22,200 – 21,200 = 1,000 x 0.18 = S$180).  Presently one Hong Kong Dollar purchases 18 Singapore cents, hence 1000 index points of intrinsic value would equate to S$180.

Cash Settlement Amount = [(Closing Level - Strike Level) x Conversion Ratio] x Exchange Rate

With the 100,000 Structured Warrants converting to 100 index units, the return to the investor in this instance would be the intrinsic value (S$180) multiplied by the amount of converted underlying units (100 index units) minus the initial outlay for the investment (S$7,900 + transaction costs). This return (100 x S$ 180 – S$7,900) would theoretically be S$10,100 (or 128% return) excluding transaction costs.

Structured Warrants are also subject to extrinsic value before expiry, and investors can exit positions anytime during the continuous trading session before expiry (no need to wait until 29 September in this example). The final cash settlement amount at expiry will be announced by the issuer. Investors will be entitled to a cash settlement amount if the amount computed from the above formula is greater than zero, which will be deposited into the Warrant holder’s bank account five to 10 business days after the Warrant’s expiry date.