Insights on Key Features, Benefits and Trading Risks

In Malaysia, there are currently six licensed structured warrants issuers: AmBank, CIMB Bank, RHB Investment Bank, Kenanga Investment Bank, Maybank Investment Bank, and Macquarie Capital Securities (Malaysia).

It is important for investors to be on the lookout and do ample research before investing in structured warrants. At a minimum, investors need to be aware of the features, risks and benefits before investing in structured warrants.

FEATURES

Structured warrants are not standardised, and this means that features can vary greatly even among warrants offered by the same issuer.

• Type
  Typically refers to whether a structured warrant is a call or put warrant.
   
• Underlying Asset
  Refers to the asset that the warrant is based upon.
   
• Effective Gearing
  Effective gearing is the percentage change in the structured warrant's price for a 1% change in the underlying asset's price. For instance, if the effective gearing of a structured warrant is 5, the structured warrant's price will change by 5% for every 1% change in the underlying asset's price.
   
• Conversion Ratio
  The conversion ratio of a structured warrant defines how many warrants must be exercised to buy (for call warrants) or sell (for put warrants) a single unit of underlying security.
   
• Exercise Price
  The exercise price (or the strike price) is the price at which a structured warrant can be exercised.
   
• Expiry Date
  The last day on which a warrant can be exercised. Any warrant that is not exercised by expiry date shall become worthless.
  
  A warrant may be exercised either in the American or European style. A European style warrant may be exercised only on the expiry date. An American style warrant may be exercised anytime during a period up to the expiry date.
   
• Settlement
  A warrant may be settled through physical delivery or cash. In physical delivery, actual transfer of the underlying asset or assets takes place while in cash-settlement, only cash equivalent to the mark-to-market gain of the warrant holder shall be transferred to the warrant holder.

BENEFITS

• Limited Downside and No Margin Call
  Unlike many other leveraged products like futures, losses in structured warrant is limited to the initial capital that an investor puts in.
  
  An investor who buy structured warrants is not required to make cash top-ups (known as margin calls) if the price of a structured warrant move against the investor.
   
• Liquidity
  An entity that issues structured warrants also acts as the market maker for its warrants during the trading hours. (Some issuers opt to designate another entity to be the market maker on their behalf.) This creates market depth and allows investors enter and exit with relative ease.
  
  The market maker provides liquidity to its structured warrants by continuously posting bid-ask quotes on the exchange so that the warrants are tradable most of the time.
   
• Leverage Effect
  Trading in structured warrant comes with the additional benefits of leverage. A minor percentage change in the price of the underlying asset can lead to a major gain in the price of the structured warrant.
  
  However, it might also lead to a major loss (in some cases almost total wipe out) in the price of the structured warrant. An investor needs to bear in mind that leveraging can work both ways; it can magnify your gains or losses.
   

RISKS

• Magnified Losses Due to Leverage
  As mentioned, a structured warrant can magnify your loss if the market moves adversely. The silver lining is that your losses are limited to the price you paid for the structured warrants.
   

• Time Decay
  Everything else equals, with the passing of each day, the warrant's value will decline. This decline in warrant value is known as time decay. Nonetheless, often the time decay is relatively small when compared to other factors that also affect a warrant’s pricing like market volatility and price of underlying asset.

  Structured warrants are more suitable for short term trading rather than long term holding owing to time decay.

  Again, an investor should always bear in mind that warrants that are not exercised by expiry shall become worthless.

• Liquidity Risk
  Although structured warrant market makers are obliged to provide liquidity most of the time, finding a reasonable price to sell your warrants might sometimes be challenging.
  
  This kind of liquidity risk might happen because of insufficient buy orders for structured warrants in the market, which in turn ends up affecting the market price of the warrants. This is why investors who intend to trade their structured warrants must monitor the market for volume and bid/offer prices.
   
• TRADING WARRANTS
  Structured Warrant is a versatile and low-cost tool for short term trading. One can buy a call warrant to quickly gain a leveraged position on some hot stocks or assets. One can also make gains from falling prices by buying into put warrants. As such, there is always opportunities to make investment gains in the structured warrant market, no matter the market trend. Trading of warrants is also as easy as trading shares. Investors may buy or sell the same warrant repeatedly.
  
  Last but not least, investors should always bear in mind the risks involved when trading warrants and strive to gain a better understanding of structured warrants before venturing into the market. For those who have mastered trading structured warrants, it could prove to be both rewarding and exciting.