Ping An Securities Derivatives Department
The risk tolerance of investors is an important consideration in formulating investment strategies. Since the resumption of warrant trading in China in 2005, the warrant market has been active, and many investors have been attracted by the high leverage of warrants. Moreover, due to the implementation of the T+0 trading system of warrants, that is, warrants bought on the same day can be sold on the same day, warrant trading is undoubtedly more liquid than stocks. However, the risk of warrants is usually much greater than that of stocks, and the risk of different warrants is also very different. Some deep in price warrants are less risky, while the expiring deep out of price warrants are very risky. Then, how should investors choose the appropriate warrant varieties according to their own risk tolerance?
There are many differences between warrants and stocks in nature. First, the warrants are time limited. This means that warrants generally cannot be "covered" like stocks, because warrants have time value, and the time value of warrants will gradually decrease with the passage of time. Second, the price of warrants is affected by many factors, the most important of which is the change of the price of the underlying shares. This includes two aspects, one is the rise and fall of the stock price, the other is the change of the extension amplitude. The impact of the rise and fall of positive shares on warrants is very intuitive, and the change of the extension amplitude is easy to be ignored by investors.
Therefore, these two aspects determine that warrant investors should have sufficient time to pay attention to the market and understand the technical factors affecting the price of warrants. For enterprising investors with strong risk tolerance, the purpose of investing in warrants is generally to obtain more leverage returns. Such investors are risk preference type, and the highly leveraged varieties are undoubtedly most favored by such investors. Such investors can choose some out of price warrants, which are characterized by low price and high effective leverage. In this way, when investors look at the direction of positive shares, they will usually get higher returns from investing in such warrants.
However, it should be noted that high leverage is a "double-edged sword", and investors will also face greater losses when the positive shares change in an unfavorable direction. For steady investors, what they seek is to let their assets gain more value, but they are unwilling to bear great risks. For them, the high leverage variety is not the best choice. Instead, they should choose warrants that are in the price, have a reasonable valuation, and have a long residual period. The advantage of this type of warrant is that when the performance of the equity is relatively stable, the price of the warrant will not rise and fall sharply, so the risk is low. When investors look at the right direction, they can also get higher returns than investing in stocks. Moreover, because the warrant is in the price, it has intrinsic value, especially when it expires, because the warrant itself has the exercise value, the warrant will not have the risk of returning to zero.
