Rational understanding of how warrants rebound

⊙ Qiu Xiaoping of Zheshang Securities

Since the vast majority of warrants in China are subscription warrants, coupled with their high leverage, the warrant sector has significantly outperformed the market in this round of rebound, while the performance of warrants is even better, with an average increase of up to 32%! The best performing warrants were Tsingtao Beer CWB1 and WISCO CWB1 with valuation advantages, up 73% and 54% respectively. In addition to the above two major advantages, another important factor supporting the overall market strength is the expectation of the launch of margin trading. The person in charge of the regulatory department also said that "securities companies will arrange and promote margin trading in a timely and orderly manner."

In fact, reducing the stamp tax rate is not good for warrants. Because the warrant transaction does not need to pay stamp duty, the reduction of stamp duty reduces its cost advantage instead. Margin trading is like stock index futures. Its launch has a "neutral" impact on the market and will not change the long-term trend of the market. However, in the short term, as the subject of margin trading and collateral, large market blue chips will inevitably be sought after by the market and enjoy a certain liquidity premium when margin trading is launched. Since most of the positive shares of warrants are large blue chips, they should also enjoy a certain liquidity premium. Therefore, the sharp rise of warrants is entirely due to the sharp rise of positive shares and the high leverage of warrants.

From the perspective of valuation, there are two indicators to measure the valuation level of warrants premium rate and implied volatility. The premium rate of warrants is closely related to the degree of inside and outside the price. Generally speaking, the higher the degree of out of price, the higher the premium rate. Therefore, in price warrants and out of price warrants should have different premium rates, just as companies in cyclical and non cyclical industries should enjoy different PE. If you choose warrants purely based on the premium rate (just like selecting stocks only based on PE), it is easy to go astray. Although warrants with negative premium rate have certain valuation advantages, they are not necessarily good investment targets before the launch of securities lending business. Because the warrant has a certain price discovery function, a negative premium rate indicates that the market is not optimistic about its future performance, and the next trend is most likely to be the sharp decline of positive shares driving the decline of the warrant. For example, the premium rate of WISCO CWB1 rose from - 16% in January to - 1.4% at present, but the price of warrants fell from 9 yuan to 6.8 yuan.

Since the positive shares of different warrants have different volatility, the implied volatility is generally compared with the historical volatility, combined with the effective leverage ratio, to judge whether the warrants have valuation advantages. The effective leverage ratio is the elasticity of warrants relative to the stock price. The greater the elasticity, the more obvious the leverage advantage of warrants; However, if the valuation is abnormally high, high leverage will only make investors face greater risks.