Ping An Securities Derivatives Department

As an investment tool, warrants can bring considerable gains when they rise, but the losses when they fall are usually more serious and often make investors unprepared. Therefore, when investors misread the direction and cause losses, they must take a timely stop loss strategy to try to control losses within a small range and effectively protect the safety of most of the principal. Specifically, the significance of timely stop loss in warrant investment is shown in the following aspects:

First, compared with stocks, the investment period of warrants is limited by the duration. For stocks, investors can hold them for a long time as long as the corresponding listed companies have good fundamentals and continue to develop. The essence of warrants is an option contract with a certain duration. Once the duration expires, the warrants out of the price will no longer have any value. Therefore, if investors are hedged in the warrant market, they must carefully consider whether the warrants can be closed in the price at the expiration, because once the warrants are still out of the price at the expiration, and the investors have not stopped loss in time, the premium paid will be all returned to zero.

Secondly, warrants have leverage effect. Generally speaking, the volatility of warrants is far greater than that of corresponding stocks. In other words, when the investment principal is the same, the investment warrant will bear more risks. For example, if an investor buys a subscription certificate with an effective leverage of 5, if the corresponding positive share price rises by 10%, theoretically, the investor can obtain 50% of the return; Similarly, if the positive share price drops by 10%, investors will also face a loss of 50%. Therefore, in such a high-risk environment as the warrant market, risk control becomes crucial, and stop loss is an important means to achieve the purpose of effective risk control. Not only that, stopping loss in time in the warrant market is the guarantee of "large profits and small losses", which also provides investors with an opportunity to start again. Therefore, in the process of warrant investment, it is very necessary to stop loss in a wrong direction.

Finally, for some warrants whose value is seriously overestimated beyond the deep price, and whose price increases greatly simply due to the speculation of market funds, the setting of stop loss position is particularly important. Because these warrants are generally low in absolute price and easy to speculate, when the market is active and supply exceeds demand, they will attract many investors to follow suit and have a large increase. However, investors need to note that once the activity of warrants decreases, the valuation level of such warrants will easily fall back quickly, resulting in increased investment risk. In addition, the time value of out of price warrants declines rapidly, resulting in a higher risk of investing in such warrants. This is especially true for warrants that are about to expire. If investors are hedged in the process of following the trend and do not stop loss in time, they are likely to lose money with the expiration of the warrants.

In fact, China's warrant market implements the T+0 trading mechanism, which also provides convenience for investors to stop losses in time. Especially for some investors who like intra day trading, when the loss reaches a certain level, they can cut out positions in time to save their capital strength and wait for the opportunity to operate the next band.