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CWQuah
Master |
29-Jul-2008 00:22
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Reposted due to incomplete post earlier.
Role of underlying asset price, volatility
WE take a closer look at the two most important factors that determine the price of an actively traded warrant. These are the price of the underlying stock or index and its expected volatility, which is an estimate of how large the future price movements of the asset will be. In practice, both factors often change at the same time and this may cause the warrant price to move in unexpected ways. For a call warrant, which gives investors the right to buy the underlying asset at a fixed exercise price when the warrant expires, the price should move in the same direction as the underlying asset price, assuming that other factors remain unchanged. That's because an increase in the price of the underlying asset makes it more likely that the warrant will expire in-the-money, which makes the warrant more valuable to the holder. Similar reasoning suggests that the price of a put warrant, which gives investors the right to sell the underlying asset at a fixed price when the warrant expires, should move in the opposite direction of any changes in the price of the underlying stock or index. But an unusually big move up or down in the underlying asset price, or a sudden change in direction of its price movements, is likely to also trigger a change in estimates of its future volatility, which in turn affects how market-makers and other investors value the warrant. An increase in the expected volatility of the underlying asset makes any warrant - call or put - more valuable to the holder, as it makes it more likely that the warrant will expire in-the-money. For example, at last Friday's close, the biggest percentage gainer was a call warrant written on the stock of CapitaLand. CapitaLand's share price fell 3.1 per cent to $5.91 that day, but the call warrant rose 25 per cent to five cents. That's because the expected volatility of the stock rose that day, so the net effect was to make the warrant more valuable, despite the fall in the underlying stock price. Importantly, an increase in expected volatility is especially likely if the underlying asset price exhibits not only an unusually large movement, but a change in the direction of movement from the previous day. That is, if a stock has gained about 1-3 per cent each day for the past three days, and then moves down 5 per cent the next day, that would trigger a bigger increase in expected volatility than an upward move of 5 per cent that day. This column is brought to you by Merrill Lynch Please send your questions to btwar@sph.com.sg |
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CWQuah
Master |
29-Jul-2008 00:20
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Just wanted to share some details on why sometimes warrants are so non-intuitive to trade. The article below describes the influence of 2 factors (out of 5 key factors) on warrants pricing.
Role of underlying asset price, volatility
In practice, both factors often change at the same time and this may cause the warrant price to move in unexpected ways. For a call warrant, which gives investors the right to buy the underlying asset at a fixed exercise price when the warrant expires, the price should move in the same direction as the underlying asset price, assuming that other factors remain unchanged. That's because an increase in the price of the underlying asset makes it more likely that the warrant will expire in-the-money, which makes the warrant more valuable to the holder. Similar reasoning suggests that the price of a put warrant, which gives investors the right to sell the underlying asset at a fixed price when the warrant expires, should move in the opposite direction of any changes in the price of the underlying stock or index. But an unusually big move up or down in the underlying asset price, or a sudden change in direction of its price movements, is likely to also trigger a change in estimates of its future volatility, which in turn affects how market-makers and other investors value the warrant. An increase in the expected volatility of the underlying asset makes any warrant - call or put - more valuable to the holder, as it makes it more likely that the warrant will expire in-the-money. For example, at last Friday's close, the biggest percentage gainer was a call warrant written on the stock of CapitaLand. CapitaLand's share price fell 3.1 per cent to $5.91 that day, but the call warrant rose 25 per cent to five cents. That's because the expected volatility of the stock rose that day, so the net effect was to make the warrant more valuable, despite the fall in the underlying stock price. Importantly, an increase in expected volatility is especially likely if the underlying asset price exhibits not only an unusually large movement, but a change in the direction of movement from the previous day. That is, if a stock has gained about 1-3 per cent each day for the past three days, and then moves down 5 per cent the next day, that would trigger a bigger increase in expected volatility than an upward move of 5 per cent that day. WE take a closer look at the two most important factors that determine the price of an actively traded warrant. These are the price of the underlying stock or index and its expected volatility, which is an estimate of how large the future price movements of the asset will be. |
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AK_Francis
Supreme |
14-Jul-2008 11:53
Yells: "Happy go lucky, cheers." |
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well explained by all sifus. very indept. had learnt. |
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CWQuah
Master |
14-Jul-2008 00:55
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One thing to add, especially if you intend to do intraday trading for index warrants - it's a very common misconception that the value of the warrants are based on the index values. It's important to note that the warrants actually change in value in reaction to the respective index FUTURES, not the index values. The reason is that the market makers actually base the warrant valuations on the future expected values of the index and NOT the current index values. That is why sometimes, even when the indices are static, you see very sudden changes in the values of warrants, or that the warrant valuations actually run opposite to the normal direction of movement (i.e. puts actually going up while the index moves UP). That is one of the reasons why warrants are risky - how can anyone really forecast the future? For those serious in trading warrants on intraday basis, it's important that one has live feeds on index futures data and charting software to make trade decisions that are more sound. Above all trade carefully.
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oyanren
Member |
13-Jul-2008 15:56
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Thank you both for the informative reply! =) |
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elfinchilde
Elite |
13-Jul-2008 15:53
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heya noobie, those are warrants, which are leveraged products on either indices (HSI, STI etc) or stocks. call warrants mean you're bullish on a counter (expect it to go up), put warrants mean you're bearish (expect it to go down). how you read a warrant is as such: counter, strike px, issuer, type of warrant, call/put, date of expiry. So: if it's HSI 210000 MBL E PW 080828: 1) You're playing on the HSI. 2) The strike level is 21,000. 3) MBL is the name of the issuer 4) E = european type warrant. as opposed to american (which are rarely available here anw). European warrants means you can convert it anytime; american warrants can be encashed only at expiry. that's if your base is a stock. 5) PW = put warrant. 6) Expiry date of warrant is 28th aug 2008. ---------- ie, you're buying a put warrant on the HSI, for it to be below 21,000 by 28/8/08. for calculation purposes: if you wish to estimate the value of your warrant by a specific date: go to http://sg.warrants.com/singapore/en/home.cgi , and find your warrant, use the calculator for an estimate. note, if you're new to stocks, i'd seriously advise you to steer clear of warrants at the start. they are highly leveraged and volatile instruments: you can easily lose 25% or even 100% in a single day. Of course, you can easily make just as much. So if you're into warrants, your technical skills must be good. Selection of warrants isn't that easily done, either. you need to note expiry date, and volatility of the warrant (esp if you're trading it). Time decay is an impt factor: even if you're right on your call, but the date is too close to the expiry, you're likely to be in the red. apparently, 90% or more of warrants expire worthless. So i'd actually advocate trading warrants rather than holding to expiry date. cheers. |
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oyanren
Member |
13-Jul-2008 15:51
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Okay. Den how about the HSI21000MBLEPW080828? |
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joshlai86
Veteran |
13-Jul-2008 15:42
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they are diiferent warrants for singtel, such as call n put warrants, with different exercise prices n dates. | ||||||
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oyanren
Member |
13-Jul-2008 15:30
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Hi, I am pretty interested in shares and being relatively new to this. I have alot to pick up. Can you guys please explain to me this? I have seen this on the SES Mainboard. For Eg. HSI21000MBLEPW080828 And for Eg. Singtel shares. There are SingTel BNPeCW100218, SingTel BNPeCW100413, SingTel BNPeCW080711 and a couple few more. What is the difference? Thanks! |
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