Series of Lectures on Covered Warrants (XVI) Differences and Similarities between Covered Warrants and Option Investment
Ping An Securities Derivatives Department
Covered warrant is a kind of option in essence. The so-called option refers to the right of the buyer to buy or sell a certain amount of underlying assets to the seller at a predetermined price (strike price) within a certain period of time in the future (American option) or a certain date in the future (European option) after paying a certain amount of money (interest) to the seller. In fact, the option transaction is the transaction of this right. The buyer can exercise or abandon this right, and can choose flexibly. The covered warrant is a contractual relationship between the issuer and the holder. The holder has the right to purchase or sell a certain amount of underlying assets from the warrant issuer at a specified price within a specified period or period of time. Therefore, in essence, both options and covered warrants are contracts that can give their holders certain rights. Their holders can exercise such rights when they can make a profit. If they can't make a profit, they give up such rights. What they lose is the cost of purchasing such rights. However, when it comes to investment operations, they are very different.
First, an option is a standardized contract that is traded on an exchange, and as long as the transaction is completed, an option contract will be generated. In theory, the supply of options is unlimited, and the terms of the option contract are formulated by the exchange, so the choice of subject matter is relatively limited. The circulation of warrants is usually relatively fixed shares The selection range of is also relatively wide. For example, in the Hong Kong market, covered warrants are issued by international investment banks. When one covered warrant accounts for 50% or more of the issue, the issuer can choose whether to issue additional warrants or not; Before the listing of additional certificates, the supply is limited, and the performance of warrants will be more vulnerable to market sentiment. From this point of view, covered warrants are more vulnerable to the impact of supply and demand and market sentiment than options, and short-term price fluctuations may also be more intense.
Secondly, from the risk perspective, there is a short selling mechanism for options, but there is generally no short selling mechanism for covered warrants. Therefore, option investors have both long positions and short positions, while warrant investors can only be long contract positions. When buying options or warrants, the potential risk and return are "unlimited win and limited lose". If the trend of the positive shares is in line with the expectation, the prices of options and warrants will rise if the time value loss and extension amplitude are not considered unchanged; If you look in the wrong direction, the biggest loss is all invested capital. Because there is a short selling mechanism in options, theoretically, investors can use short selling options to collect option premium, but in this period, if the right investors see the wrong direction, they may bear unlimited risks.
Third, covered warrants and options are substitutive, so their positions in the same country or region are often different. Taking the Hong Kong market as an example, there are continuous quotations from issuers in the Hong Kong warrant market, and the warrant liquidity is generally good. The options market is different. Although there are listed options for investors to buy and sell, the trading of listed options for many stocks is relatively light, and the bid ask spread is also wide, so that the Hong Kong options market is less active than the warrant market.
For more warrant information, please visit Ping An negotiable securities Warrant website http://www.pa18.com/warrants
Sina statement: The content of this article is purely the author's personal view, only for investors' reference, and does not constitute investment advice. Investors operate accordingly at their own risk.
