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WARRANTS

WARRANTS

What are Warrants?

Warrants have become increasingly popular because they give investors exposure to an underlying share/index for a fraction of the price. The movements in the warrant price are also usually much greater than the movement in the price of the underlying share/index. Which means their potential to deliver a higher percentage return is also increased.

Company Warrants are instruments issued by listed companies that grant the holders the right, but not the obligation, to receive shares at a fixed price during a specified period of time. 

A Structured Warrant (SW) is a security that gives the holder the right but not the obligation to buy or sell a specific underlying asset at an agreed price (strike price) on the expiry date. As an investment tool, it provides investors’ exposure to an underlying asset for a fraction of the price. On the Bursa Malaysia, warrants are currently available over shares and indices.

  • Call Warrants: if the settlement price of the underlying is above the strike price at expiry, the call warrant is deemed to be “in-the-money” and the holder will receive a cash payment. Otherwise the warrant will expire worthless.
  • Put Warrants: if the settlement price of the underlying is below the strike price at expiry, the put warrant is deemed to be “in-the-money” and the holder will receive a cash payment. Otherwise the warrant will expire worthless.
  • Right to BUY underlying asset at future date at fixed price
  • Increase in value when underlying asset goes UP.
  • Right to SELL underlying asset at future date at fixed price
  • Increase in value when underlying asset goes DOWN.

Here’s a look at an example of an investment in a call warrant over Share A. The dotted line here represents the Share A underlying share while the yellow line is the call warrant over Share A. As we can see from the graph, the two lines move in tandem with each other – the call warrant moves up when the Share A underlying share goes up, and likewise follows it downward.

Suppose you have a bullish view on Share A with the share price at MYR 8.40. In this case, instead of paying MYR 8.40 per share for an exposure over Share A, you could buy a call warrant for under MYR 0.20, less than three percent of the share price.

Assuming your view was right and Share A moved to your target price of MYR 9.10, this would translate to a return of 8.3% in 2 months if you had purchased the shares. However, if you bought the call warrant instead of the shares, you would have made a 53.3% return, more than 5 times that of the share price move.

This is an example of gearing at work, and the advantage warrants offer – a greater potential profit as a percentage of your invested capital.

 Share ACall Warrant A
6 MayMYR 8.40MYR 0.230
11 JulyMYR 9.18MYR 0.395
Profit+9.3%+71.7%
Note: Example is hypothetical and used here for illustration only.

If you want to profit from downward movements or are fearful of losses on your existing portfolio from short-term corrections, put warrants may be the instrument you are looking for.

In our example below using a put warrant over Share A, you can see that the put warrant, denoted by the yellow line, moves in inverse directions with the Share A which is denoted by the dotted line.

If you have a view that the Share A had moved too high within a short space of time and due to fall, you could purchase a put warrant on Share A to profit from your view.

In our example, the Share A took a 10.9% tumble over one month. If you had purchased the put warrant at MYR 0.23 when the underlying share was at MYR 9.20, you could then sell the put warrant at MYR 0.42 when the share was traded at MYR 8.20, earning a profit of 82.6%.

If you were holding Share A, the 82.6% gain from the put warrant could be used to offset the losses you had on your shares. This strategy is known as “hedging”.

 Share APut Warrant A
11 JulyMYR 9.20MYR 0.23
11 AugustMYR 8.20MYR 0.42
Profit/Loss-10.9%+82.6%
Note: Example is hypothetical and used here for illustration only.

Why trade Warrants?

  • Warrants grant you the right to receive a stock of a company at a certain price (Exercise Price) within a set period of time.
  • When exercised, a Structured Warrant will grant you the cash difference between the Market Price and the Warrant’s Exercise Price.
  • While exercising your Warrant sounds great, the true value of Warrants comes from trading Warrants.
  • Traders can use this to earn higher returns with less starting funds

A warrant enables you to gain exposure to a security for just a fraction of its price, meaning you can get a similar effective exposure for a much smaller capital outlay. Therefore, warrants tend to move in greater percentages than the underlying shares, allowing you the potential for higher percentage returns than if you had bought the shares directly. This is known as the gearing effect and the main reason warrants are so popular with investors.

 

Share vs Warrant Performance

  • Gearing is one of the biggest benefits of warrants but gearing is a double-edged sword, as it also exposes investors to greater potential losses in percentage terms if their view is wrong. However, the difference between warrants and many other forms of leverage is that your risk is limited to the initial payment, meaning you can increase your exposure while limiting your capital at risk

    You can achieve an increased effective exposure of MYR 10,000 by buying MYR 2,000 worth of warrants, which limits your total capital at risk to MYR 2,000. If you were to achieve the same exposure by buying the share directly or through share margin financing, you would be exposed to the full MYR 10,000.

  • Warrants provide investors the opportunity to profit from both share price increases and falls. Call warrants can boost investors profit potential from share price rises while put warrants enable investors to benefit from sell-downs. Put warrants are particularly useful as they are one of the few instruments in Malaysia that allow retail investors to go ‘short’ (i.e. profit from downward moves) in shares.

    Put warrants can also be used as a form of insurance to protect an existing share portfolio against a falling market (a process called “hedging”). An investor with a holding in a particular share who is nervous about the future direction of the market, could purchase a put warrant. If the share price falls, the gains made on the put warrant can be used to offset the losses on their shares.

    This allows the investor to retain share ownership without having full exposure to the downside risks. Index warrants are most typically used for hedging. Investors should, however, understand the complexity of utilising warrants for hedging or portfolio protection purposes. For example, the value of the warrant may not exactly correlate with value of the underlying shares.

  • Even if the underlying share or index moves adversely, warrant investors will not need to make margin top-ups. The maximum exposure to the investor is set up front at the start of the trade. So you can rest a little easier.

Warrants enable investors to gain exposure to blue chip shares for a fraction of the share price. An investor interested in purchasing shares who does not have immediate access to funds could purchase call warrants to capture the benefits of an anticipated price rise. Because of the significantly lower outlay for warrants, brokerage and transaction costs are also lower.

 SharesSimilar exposure through Warrants
CostMYR 50,000MYR 10,000
Brokerage Cost*MYR 200MYR 40
Stamp duty*MYR 50MYR 10
*Assuming brokerage cost of 0.4% and stamp duty of 0.1%



Using warrants to gain exposure to shares can free up the capital that would otherwise be invested into fully paid shares. Alternatively, an investor may sell existing share holdings and gain a similar effective exposure by purchasing call warrants for a fraction of the price. The investor has maintained exposure to share prices while releasing capital from the share holding.



Warrants are traded on the Bursa Malaysia allowing investors to buy and sell warrants just like shares. Due to the existence of designated market makers, warrants are typically very liquid meaning there should be sufficient volume on the bid and offer for investors to easily enter and exit their trade.

How are Warrants priced?

The value of a Warrant is determined by six variables.

The underlying share price (or index) – is one of the most important determinants of the warrant price. As the share price increases, the value of the call warrant will increase and the put warrant price will fall (the same works in reverse). To see how the share price affects the warrant price please refer to the previous example.

  • Also commonly known as Strike Price, this is the fixed price at which investors are entitled to buy the underlying share on the expiry date for call warrants (or sell, in the case of put warrants). As such, the higher this price, the less likely the call warrant will be exercised and hence, the less value ascribed to the warrant. Conversely, in the case of a put warrant, the higher the price at which you are able to sell the asset on a future date, the more likely the put warrant is to be exercised and hence, a higher value ascribed to that warrant.

  • The future date at which the warrant will cease to exist is known as the expiry date. For both calls and puts, the longer a warrant has time remaining until expiry, the higher the value of the warrants. This is because, the longer a warrant has remaining until expiry, the higher the probability of it expiring with value.

  • Volatility can be defined as “a measure of uncertainty about the future performance of a stock”. The higher the uncertainty, the more volatile the share price will be. Higher volatility leads to a higher price for the warrant, for both calls and puts. Implied volatility may be affected by the demand and supply for the warrant. A high demand can lead to higher implied volatility levels of the warrant and hence a higher price and vice versa.

    For a more detailed description of implied volatility, click here.

Although warrant holders do not receive dividends, they will not be disadvantaged in this respect as forecast dividend are already priced into the warrant. As such, call warrants will not fall in price if the underlying shares fall by the dividend amount on the ex-div date.

Similarly, put warrants will not increase in price in such a scenario. If however, there is a change in the forecast dividend announced on the stock, where the actual dividend comes in higher than the amount forecasted in the warrant, this can lead to a drop in the price of a call warrant and an increase in the put. Corporate actions (such as special dividends, capital repayments, share splits and rights issues) are treated separately and adjustments will be made to the warrant terms.



Interest rates will affect the price of a warrant through financial holding costs. Typically, when you buy a call warrant, issuers will hedge their position by buying the underlying share. This requires funding and, as such, when the cost of borrowing goes up as a result of rising interest rates, the price of a call warrant will also go up. The inverse is true for a put warrant.



  • When choosing an appropriate warrant, investors should be more concerned with the first four factors. Generally, the last two factors – dividends and interest rates – have a smaller impact on the warrant price.

Understanding the Warrant Structure?

Intrinsic Value & Time Value.

A warrant’s value consists of:

1

Intrinsic Value

When the exercise price of a call warrant is below the underlying’s current share price, it is said to have ‘intrinsic value’. Have a look at the example below. In this case the exercise price of MYR 3.00 is at a MYR 0.30 “discount” from the current share price, this is its intrinsic value. As such, this warrant will have a minimum price of MYR 0.30 – its intrinsic value. All call warrants with an exercise price lower than the spot price should always be worth at least the intrinsic value.

 
2

Time value

A warrant will usually be worth more than its intrinsic value. As you can see in this example, the warrant is priced at MYR 0.40, which is MYR 0.10 more than its intrinsic value. This remaining value is called ‘time value’.

  • The time value portion of a warrant’s price will slowly reduce throughout the life of the warrant. This process is called ‘time decay’, or ‘theta’. The theta of a warrant is not constant and will speed up as the warrant approaches its expiry. A general rule of thumb is that a warrant loses 1/3 of its time value in the first 2/3 of its life.

  • Moneyness refers to the relationship between the exercise price and the current share price.

    The call warrant in the previous example has intrinsic value because the exercise price is below the current share price (reverse for puts). Warrants with intrinsic value are termed in-the-money (or ITM). When the exercise price is above the current share price for a call, it is termed out-of the money (or OTM) and when the exercise price and current share price are equal, it is termed at- the-money (or ATM).

    Changing share prices mean that the moneyness of a particular warrant can often change several times throughout its life, in-the-money warrants can thus quickly become at-the-money or out-of- the-money, or vice versa.

    There is no particular moneyness that is favoured by all investors, each has their own advantages and disadvantages and are suited to different investors and/or different trades. The main characteristics are summarised in the below table.

Monitoring price changes?

Intrinsic Value & Time Value.

In order to track the price changes of listed securities, information sources such as the media, brokers and online providers will typically publish the “daily price change” for shares/warrants, comparing of the current traded price versus its closing price the day before.

However, with warrants, this method is often totally inaccurate as warrants do not trade as frequently as shares. Therefore the price that is listed as the warrant’s “previous close” may actually relate to a trade that happened the previous morning, two days earlier, or even weeks ago.

The above chart is an example drawn by using the last prices of a share and a corresponding call warrant. You will notice the circled portions of the chart show that the ‘recorded’ warrant price has remained unchanged despite movements in the underlying share price. This is because during those periods even though the warrant’s bid and offer prices have moved up and down with the underlying share price, the warrant did not record a trade, and thus continued displaying the same price under its “last traded price”.

  • The most accurate way to calculate the price change for a warrant is to look at the change in bid prices over the period. The bid price shows the price at which you can sell your warrants and is therefore the best representation of its value at any point in time.

    The example below shows the two different methods for calculating a warrant price change. In this case, the investor wants to know how the warrant price has changed since yesterday’s close and to compare this to the underlying share price change for the same period:

    Unreliable way of calculating daily price change using last traded price:

    The above shows the method that would be published by most publicly available information sources. In this case, it is totally inaccurate as the “last traded price” for the warrant that is used as the “closing price” actually occurred the previous morning. Therefore it is inaccurate to compare this to the share price change that recorded its last trade at market close.

    Most accurate to look at bid prices over period of comparison:

    The most accurate way to calculate the price change for a warrant is to look at the change in bid prices over the period. So in this example, the investor would look at where the bid price for the warrant was just before the market close the previous day, and to compare that with the current bid price. In this way, the period of comparison for the share and warrant are the same.

  • Please note that during the pre-closing session on the Bursa Malaysia, the warrant and underlying share prices can often move up or down due to the actions of investors during the auction period. To monitor the warrant prices, it is most accurate to look at the change in bid price for the warrant. Therefore, when looking for an accurate representation of a warrant’s price at the close of day, we normally use the last bid price at 4.43 pm (for warrants over FBM KLCI and Malaysian shares).

    Here’s a summary of the timings of the previous day’s closing bid prices for warrants that investors should compare current bid prices with:

    • Warrants over FBM KLCI and Malaysian shares : 4.43pm
    • Warrants over HSI and HSTECH : 4.28pm
    • Warrants over Hong Kong shares and China A50 ETF : 3.58pm
    • Warrants over S&P 500® Index, Dow Jones Industrial Average® Index and NASDAQ-100® Index: 4.43pm

Useful Warrant terms?

There are a number of different terms that are often used when investing in warrants and it’s important to understand what these mean if you’re going to trade this important market instrument successfully.

Delta shows the approximate change in the warrant price for a small change in the underlying share (or asset) price.

 
Therefore, a delta of 50% means that the warrant should move approximately MYR 0.005 for each MYR 0.01 move in the underlying asset. Deltas for puts are negative since they move inversely with the underlying price.
General rule of thumb for delta
 CallPut
In-the-money(max)100%-100%
At-the-money50%-50%
Out-of-the-money(min)0%0%

Deltas range from 0 to 100% for calls and 0 to -100% for puts

 

  • Delta can also be viewed an indicator of the probability that a warrant will expire in the money (ie. with value). For example a warrant with a delta of 20% has a 20% probability that it will expire with value, and 80% chance that it will expire worthless.

  • When using delta to estimate how much a warrant price will move for a particular price change in the underlying, you must take into consideration the warrants per share number to estimate the “delta per warrant”. 

  • Use caution when choosing warrants that have deltas either above 80% (termed deep in the money, ITM) or below 20% (termed deep out of the money, OTM) as issuers will often widen the offer spread for these warrants to discourage further buying in these warrants. Deep OTM warrants in particular, are risky for investors to buy.

  • Exercise Ratio (also known as warrants per share) shows the number of warrants needed to exchange for one underlying share/index futures at expiry.

    The purpose of exercise ratio is really just to break down the warrant into smaller parts, so that a warrant with a price of say MYR 1.00 can be broken down into smaller parts each worth MYR 0.20 by using an exercise ratio of 5.

    When calculating many indicators or ratios, such as delta, premium, etc you often need to take into account the exercise ratio. However, throughout this website, we have already done this for you and provided all the indicators you will need to make your decisions.

    *Sensitivity change based on 10 ticks.

    Let’s take a look at an example to understand the effects of different exercise ratio. In the above table, all three warrants in the table above have the same exercise price, expiry date etc. with exercise ratio the only difference between them.

    Notice that Warrant-CA has an exercise ratio of 1 and therefore requires 1 warrant to exchange for one underlying share at expiry. It has a price of MYR 0.40.

    Warrant-CC on the other hand has an exercise ratio of 5 and requires 5 warrants to exercise at expiry, five times more than Warrant-CA. Therefore it costs exactly 5 times less at MYR 0.08.

    The delta per warrant for Warrant-CA, Warrant-CB and Warrant-CC will also be different as they have different exercise ratio figures. Remember that all three warrants are exactly the same, with the same exercise price and expiry. The delta for all three is therefore the same. However, the delta per warrant for Warrant-CA is higher as a result of being divided by a smaller exercise ratio of 1 compared to Warrant-CB for which the delta will be divided by 2. Warrant C will have the lowest delta per warrant of 10 per cent.

    The important point to understand is that while warrants with the lower exercise ratio will have a higher delta per warrant, they are also more expensive and therefore move the same in percentage terms. Meaning, if you purchased any of the above warrants, the return you will receive in percentage terms will be exactly the same. In this example, each of the warrants will move approximately 12.5% for a MYR 0.10 move in the underlying share.

    So while the exercise ratio is important for calculating ratios such as delta, sensitivity, breakeven price at expiry etc., it should not be a major factor in the decision making process for most warrant investors who are choosing a warrant.

  • A warrant’s “Sensitivity” is an estimate of how much the underlying price needs to move for a corresponding one tick (or minimum spread) movement in the warrant. We use delta and exercise ratio to calculate the sensitivity of the warrant to the underlying.

     
     

    In this example, we are using a call warrant over Share A, the warrant has a price of 20 cents.

    The exercise ratio is 2 and the warrant expires on 1 December. The delta is 100%, which means it has a 100% chance of being in- the-money (ITM) when it expires.

    Calculating the warrant sensitivity

    To calculate how many ticks in the underlying is required for a one tick move in the warrant (i.e. minimum tick of MYR 0.005 for warrants priced below MYR 1.00), you first need to know the delta per warrant.

    You would recall from the previous chapter on “Delta” that the delta formula is as below:

     

    DELTA FORMULA

     
     
     

    To calculate the “Delta per warrant”, you divide 100% by the exercise ratio of 2, to get a figure of 50% or 0.50. Now that you have the delta per warrant, you can calculate the Sensitivity, i.e. how much the underlying will move for a 1 tick move (MYR0.005) in the warrant.

    SENSITIVITY FORMULA

     

    Simply divide the change in warrant price of MYR 0.005 by the delta per warrant of 50%, and you would arrive at a sensitivity of MYR 0.01. Meaning that each time the share price moves MYR 0.01, the warrant price will move one tick, or MYR 0.005.

    See illustration for the calculation below.

     

    With a sensitivity of MYR 0.01, which is 1 tick in Share A (as with all Malaysian stocks above MYR 1.00), we say that this warrant moves “tick for tick”, which means its price will move one tick for every tick in the underlying share.

    For index warrants, the same calculation can be used.

    Example:

     

    In the case of the above Hang Seng Index (HSI) warrant, the delta per warrant can be calculated by dividing the delta of 90% by the exercise ratio of 900, which gives 0.1% or 0.001. Hence, for the warrant to move 1 tick (MYR 0.005*), the HSI will have to move: MYR 0.005 divided by the Delta per SW of 0.1%, and thereafter converted to HKD, as the HSI is based on HKD whereas the warrants are priced in MYR.

    See illustration for the calculation below.

     
     
     

    Notes:
    If the underlying share or index is not denominated in MYR, you must factor in the relevant exchange rate into your calculation.
    *1 tick equals to RM0.005 for warrants priced below RM1.00, and equals to RM0.010 for warrants priced between RM1.00 to RM9.99

     

How to select a Warrant?

There are some tips you can take a look.

Before we begin, you should first look at the nature and performance of the underlying share/index and take a view. Bullish investors may consider a call warrant while bearish investors may consider a put warrant.

 

You also need to have a target price for the stock in mind. This will help you to narrow your selection of the warrants.

Are you bullish (call) or bearish (put)?

If you are bullish on the underlying, you should eliminate put warrants from your consideration.

  • The quality and reputation of the market maker is also an important consideration when choosing which warrant to invest in. You need to be confident that the market maker will be there to provide consistent pricing throughout the life of the warrant so that you can enter/exit the trade in a fair and liquid market.

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