OREANDA-NEWS.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-to-date included 12 warrants on the Hang Seng Index (HSI), two warrants on the FTSE China A50 Index, and five stock warrants. The seven most active warrants in terms of trading value were on the HSI.  

The HSI is currently trading near 21,500 after ending July near 24,600. The two most active warrants in the month to date have been a HSI Call warrant with a 29 September 2015 expiry and a 25,200 strike price and a HSI Put warrant, with a 29 September 2015 expiry, and a 23,800 strike price.

At current index levels, the 25,200 Call warrant is considered to be out-of-the-money and the 23,800 Put Warrant is considered to be in-the-money. The HSI 23,800 Put Warrant with a 29 September 2015 expiry was listed on 4 August. From the close on 4 August 2015 at $0.146, the price of the warrant gained 256% to $0.52 as of yesterday’s close.

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

Warrant Counter Name Total turnover in MTD
HSI 25200 MB ECW150929 $19,565,455
HSI 23800 MB EPW150929 $15,622,026
HSI 24000 MB EPW150828 $13,864,809
HSI 24400 MB ECW150828 $10,900,138
HSI 22800 MB EPW150929 $8,859,646
HSI 23800 MB ECW151029 $7,990,941
HSI 23000 MB EPW150828 $6,770,854
OCBC BK MB ECW151201 $4,916,507
KEPCORP MB ECW160201 $4,621,155
HSI 22600 MB EPW151029 $4,103,505
DBS MB ECW160111 $4,032,388
DBS MB ECW151201 $3,962,575
DBS MB ECW160104 $3,904,595
HSI 25000 MB EPW150828 $3,754,994
HSI 24600 MB ECW151029 $3,552,656
HSI 26800 UB ECW151230 $3,311,138
HSI 24200 MB ECW150929 $3,273,657
FTSECHINAA50 12500 MBECW151127 $3,234,682
HSI 25400 MB ECW150828 $3,139,144
FTSECHINAA50 15000 MBECW151127 $3,107,711

The concept of ‘money-ness’
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 value of a warrant can be broken into two 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.

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.

Trading warrants on SGX

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.

Besides the benefits, investors should be mindful of potential risks of structured warrants trading. The key risk factors are market risk, issuer risk and the limited lifespan of warrants.  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. 

To increase awareness and transparency on warrants trading in its market, SGX recently started featuring on its website outstanding position reports from issuers on a weekly basis.  Market participants can refer to these reports for information on buy and sell trades as well as market makers' principal positions.