Does the issuer always take the opposite position to the warrant holder?

The corporate earnings season spurred a rally across world markets and the Hong Kong market rallied for an eight consecutive session towards the end of July.

Bloomberg reported that the Hang Seng Index (HSI) ended July with a gain of 4.48 per cent, its best monthly performance in the last 10 months. As of August 3, the Hang Seng Index stayed above its 250-day moving average, at around 21,000 points.

According to Bank of America Merrill Lynch, investors who are keen to participate in the movement of indices can explore Index Warrants.

Indices are one of the most actively-traded underlying assets in the warrants market. In Singapore, HSI-related warrants account for 40 to 50 per cent of the warrants market turnover value.

Index warrants are linked to specific indices and they provide investors with a vehicle to trade in market directions.

For example, if you hold a bearish view of the Hong Kong market and expect the HSI to fall within a one-month period, HSI-related put warrants provide the opportunity to profit from the index’s decline.

A warrant is a derivative option that provides the leverage effect.

If you have a strong directional view of the index, purchasing index warrants will provide you leveraged exposure with relatively minimal capital outlay.

Bank of America Merrill Lynch suggests that investors should understand the risks associated with warrants before making a purchase, as they may suffer from potential loss if they inaccurately forecast the underlying. It is equally important that investors manage their risks properly by defining appropriate stop-loss level.