How to invest covered warrants more effectively

Lectures on covered warrants (XVIII) How to invest covered warrants more effectively

Ping An Securities Derivatives Department

Warrant investment is similar to stock investment. The only way to profit from it is to buy at a low price and sell at a high price. However, warrants are very different from stocks, and their prices are affected by more factors. Therefore, in order to correctly judge the trend of warrant prices, investors should not only pay attention to the trend of positive stock prices, but also consider the trend of extended volatility, which we mentioned in previous articles. In this issue, we will make a brief analysis on how to master the topic of warrant investment more effectively.

First of all, the premise of investment warrants is to have a certain view on the future trend of positive shares. Without considering the influence of other factors, the price of positive shares will rise, and the theoretical price of warrants will rise; On the contrary, when the positive stock price falls, the theoretical price of the put warrant will rise. Due to the leverage effect of warrants, warrants can amplify returns on the premise of seeing the future trend of regular shares. Of course, amplifying gains can also amplify losses. If you misread the future market, the losses will also exceed the positive shares. Investors should pay attention to the investment risks arising therefrom.

Secondly, in addition to the future trend of positive shares, the change of extension amplitude also has an impact on the price of warrants. The increase of extension amplitude is beneficial to the price of both subscription warrants and put warrants. In theory, if investors see the future trend of the extension amplitude, they can also buy low and sell high to gain the extension amplitude difference. For the extension amplitude, investors in the A-share market pay little attention to it today, mainly because the extension amplitude of warrants in the A-share market has lost its reference value, but in the mature covered warrant market, the extension amplitude is a very important factor. For example, in the Hong Kong covered warrant market, investors who buy or sell covered warrants will consider the trend of the underlying stock and the extension amplitude as the most important factors. However, due to the limited information on the market extension, the transparency of OTC derivatives market transactions is low except for the listed options market. It is difficult for ordinary investors to grasp the trend of the extension of derivatives market. Extended amplitude can directly affect the price of warrants. If investors cannot accurately judge the trend of extended amplitude, they can select some warrants with relatively stable extended amplitude, which helps reduce risk.

Third, many investors are concerned about the profit and loss of warrants when they are due to exercise, that is, they value the premium rate of warrants. In fact, investors should take the future trend of positive shares and the trend of extended volatility as the most important consideration for trading warrants, especially for short-term trading. Warrant trading generally adopts the T+0 system, which is the same in Hong Kong warrant market and A-share warrant market. After buying warrants, if the price of warrants can rise as expected, investors can consider selling for cash, or stop loss and leave the market if the expectation is wrong. Warrants are different from regular shares. They have a certain duration. As the maturity date approaches, the loss of time value will continue to accelerate. From the perspective of time value, long-term holding of warrants will only increase the investment cost.

In general, to make money from investment warrants, the most basic thing is to have a certain view on the future trend of positive shares and the trend of extension amplitude. However, because it is difficult to master the trend of extension amplitude, ordinary investors can consider investing in warrants with relatively stable extension amplitude to avoid unnecessary risks. At the same time, in order to avoid the increase of investment cost caused by the loss of time value, the time of holding warrants should be shortened as far as possible to avoid long-term holding.

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