OREANDA-NEWS. There were 141 structures warrants listed on Singapore Exchange (SGX) that traded during the month of June. Structured warrants are products issued by a financial institution to enable investors to leverage on the upside and downside price movement of the underlying asset.

Call warrants offer the right to buy the underlying and benefit from the upside price movement. Put warrants benefit when the underlying declines. Put warrants represent an efficient means for investors to participate in the decline of the underlying index/stock or hedge against a decline in their portfolio holdings. Unlike investors who borrow stock to short-sell or short derivatives such as futures, options or CFDs, warrants investors are not subject to margin requirements and do not risk more than their initial investment.

The 20 most actively traded structured warrants on the SGX in the month of June included 14 warrants on the Hang Seng Index (HSI), two warrants on the FTSE China A50 Index, and four stock warrants. The eight most active warrants in terms of trading value were on the HSI.  The HSI ended June at 26,250 after ending May at 27,424. As of this morning the Hang Seng Index was trading at 25,200. The most active warrant in June was a put warrant with a 30 July 2015 expiry and a 26,400 strike price.

The most active SGX listed warrants for the month of June are tabled below.  

Most Active Call and Put Warrants in June

Name of Warrant June Traded Value S$
HSI 26400 MB EPW150730 78,092,795
HSI 27600 MB ECW150730 69,663,653
HSI 26800 MB ECW150730 25,655,268
HSI 27000 MB EPW150629 25,342,007
HSI 27400 MB ECW150629 17,910,213
HSI 26200 MB EPW150629 17,464,075
HSI 28200 MB ECW150629 16,224,991
HSI 27200 MB ECW150828 14,537,282
DBS MB ECW150915 11,960,782
HSI 25800 MB EPW150828 11,777,156
HSI 29200 UB ECW150929 10,673,077
UOB MB ECW151001 9,636,993
HSI 28400 MB ECW150730 9,246,689
FTSECHINAA50 14000 MBECW150929 8,726,323
FTSECHINAA50 15000 MBECW150730 8,182,797
OCBC BK MB ECW151201 6,349,811
HSI 26200 MB ECW150828 5,149,154
HSI 29200 MB ECW150730 4,905,081
HSI 28000 MB ECW150828 4,720,810
DBS MB ECW151001 4,275,343

The value of a warrant can be broken into 2 components, which include the intrinsic value and the time value. The intrinsic value fluctuates with the underlying asset price and is the difference between the spot price of the underlying asset and the strike price of the warrant. Time value is the amount of premium above the intrinsic value and it decreases over the life of the warrant.

Some of the key factors that influence the warrant price after it is listed are displayed in the table below.

Key Factors*

Change in Warrant Value

Call

Put
Underlying Asset Price Increases

Increase

Decrease
Implied Volatility of Underlying Asset Increases

Increase

Increase
Time to Expiry of Warrant Decreases

Decrease

Decrease

*Other factors like dividend yield and interest rate may also affect the price of a warrant, but to a lesser extent.

Strike Price

Strike price is the pre-determined or fixed price at which the warrant holder can buy (for call warrants) or sell (for put warrants) the underlying asset. June’s, the most actively traded put warrant (HSI 26400 MB EPW150730) that expires on 30 July 2015 has an exercise price of 26,400, and June’s most actively traded call warrant (HSI 27600 MB ECW150730) that expires 30 July 2015 has an exercise price of 27,600.

A structured call warrant is said to be “in-the-money” if the market price of the underlying asset is higher than exercise price of the warrant, and “out-of-the-money if the market price of the underlying asset is lower than exercise price of the warrant. On the other hand, a structured put warrant is said to be “in-the-money” if the market price of the underlying asset is lower than exercise price of the warrant, and “out-of-the-money” if the market price of the underlying asset is higher than exercise price of the warrant

The position of a warrant – whether it is “in-the-money” or “out-of-the-money” – can change according to moves in the underlying asset price.

An upward movement in the underlying asset makes a call warrant/option more valuable and a put warrant/ option less valuable. In terms of the implied volatility of the underlying asset, the higher the price fluctuation of the underlying asset, the greater the potential for the warrant/option to trade in-the-money and hence, the increase in both call and put warrant values. The shorter the time to expiry, the lower the possibility that the underlying asset’s price moves in favour of the warrant holder. All else being equal, this results in a lower time value of the warrant.

The variety of Structured Warrants allow individual investors to assume positions that are based on their risk profiles and investment objectives. For example, a warrant which is in-the-money (that is, the exercise price is lower than the underlying market price) may be more responsive to movements in the underlying asset but offers less leverage compared to warrants which are out-of-the-money. Warrants that have a longer time-to-expiry tend to have slower time decay than shorter-dated warrants, and may be more suited for longer-term investors.

Risks of Structured Warrants

Besides the benefits, investors should be mindful of potential risks of structured warrants trading. The key risk factors are:

  • Market Risk – prices and corresponding values can move against expectations and past performances do not guarantee future results.
  • Leverage – besides multiplying gains, losses may be magnified when the underlying asset moves adversely. Investors should have in mind cut-loss levels and proportion of their overall investment capital placed in leveraged products.
  • Limited Lifespan – “Time decay” is the decline in the value of the warrant as it trades towards expiry, which accelerates particularly in the last one month of the warrant’s lifespan. Time decay may be offset by a rising intrinsic value, that is, when the underlying moves in favour of the investor. Investors should choose warrants with expiry periods longer than their investment horizon.
  • Issuer Risk – Warrant holders are unsecured creditors of issuers and have no preferential claim in the event the issuers are unable to fulfill their obligations.

Structured warrants are settled on the same basis as share transactions, which is on the third business day after the trade date, or T+3.

Under MAS’ guidelines to enhance safeguards for retail investors, brokers must assess if investors have the relevant knowledge and experience before they can invest in “Specified Investment Products”. SIPs are products that have structures, features and risks that may be more complex and include structured warrants, certain ETFs, futures and options. Investors who wish to trade warrants need to complete a customer account review with their respective broker.