GF Securities: the difference between actual leverage and leverage ratio

Liu Siling, Product Innovation Department of GF Securities, primary dealer of warrants

The charm of warrants lies in its leverage effect, which can expand from small to large, that is, only a small amount of capital needs to be invested, and there will be an opportunity to obtain a return equal to or higher than that of investment in regular stocks. But in practice, investors often confuse the leverage ratio of warrants with the actual leverage. What is the difference between the two, and which is more valuable for reference?

The leverage ratio reflects the ratio of funds needed to directly buy a positive share or buy a warrant to "control" a positive share, that is, how many warrants can you buy if you use the money to buy a positive share. The formula is: leverage ratio=(positive share price/warrant price) x exercise ratio. The exercise ratio refers to the number of equity shares of a warrant that can be purchased or sold.

If the leverage ratio is 10 times, you can buy 10 warrants at the price of one positive share. In other words, when the capital invested in warrants is 1000 yuan, the capital needed to control the positive shares is 10000 yuan, which reflects the ability of warrants to enlarge the investment amount, but cannot reflect the rise and fall ratio of warrants and positive shares in the real market, that is, to enlarge the multiple of investment returns. If investors simply use leverage ratio to measure the potential return of warrants, the results may be incorrect. According to the data on Tuesday, when the positive shares rose by 1%, the leverage ratio was 5% Steel Vanadium PGP1 The actual decline is 2% (instead of 5%), while the leverage ratio is twice First JTB1 The actual increase was only 1.46% (instead of 2%). To predict the rise and fall of warrants, we should start from the actual leverage.

The actual leverage reflects the relationship between the warrant and the change of the positive shares, representing the theoretical change percentage of the warrant price when the price of the positive shares of the warrant changes by 1%. The formula is: actual leverage=leverage ratio × offset value, and the offset value represents the sensitivity of the warrant price to changes in the price of regular shares. For example, the actual leverage of Hangang's subscription is twice. When other factors affecting Hangang's subscription remain unchanged, the positive shares will rise by 1%, and the theoretical price of Hangang's subscription will rise by 2%. In summary, when investing in warrants, actual leverage should be used as a reference for return/risk rather than leverage ratio.

For example, from the 26 warrants on Tuesday, if investors are bearish, Shenneng JTP1 4.8 times of actual leverage is the highest, CMB CMP1 0.75 times of actual leverage is the lowest. As for which warrant is better, it depends on what strategy you use. If you take an aggressive strategy, you should choose Shenneng JTP1, because its leverage ratio is large enough that it will rise more when it rises; If the strategy is more conservative, buy CMB CMP1, because its leverage ratio is the smallest, and the loss is relatively small when the market falls.