What is the difference between Structured Warrants (“SW”) and company warrants?

Is buying SW similar to buying shares using share margin financing (“SMF”)?

Generally, SW provides higher leverage than SMF, and does not expose investors to margin calls. There are no additional fees like processing fees, rollover fees, etc. and there is no need to post collaterals to buy SW.

Are American-style SW better than European-style SW?

Not necessarily. American-style SW are priced higher than European-SW as American-style SW gives the holder the right to exercise at any time before expiry, whereas European-SW are only exercised on the expiry date.

How do I take profit if I am holding a European-style (i.e. exercise only at expiry) SW?

You can buy/ sell SW freely in the exchange just like shares. A good SW issuer will provide liquidity for buyers and sellers to participate in its SW.

Is shorter tenure SW better than longer tenure SW?

Longer tenure SW is more expensive because it has higher chances of becoming In-The-Money.

Does the SW price always go up on listing day?

Not necessarily. The performance of the SW depends largely on the performance of the underlying asset.

Is SW trading a “zero-sum” game? Does the SW issuer always take the opposite position to the SW holder?

As a third party issuer, Kenanga Investment Bank provides a platform for you to participate in the price movement of the underlying asset at a fraction of the share cost. The SW issuer does not take any view on the direction of the price of the underlying asset. SW issuers seek to achieve a delta neutral position by hedging its position.

Should I hold the SW until expiry?

No. SW is a short term trading instrument. Holding on to the warrants until expiry will erode the capital invested. Unless you have an extremely bullish view on the underlying asset, you should not buy and hold the SW until expiry. If you decide to hold to maturity, it could cause a loss to your warrant trade because of the Time Decay. 

Are lower priced SW better?

Not necessarily. Lower priced SW usually have a higher Exercise Ratio which means the SW has very low sensitivity (high ticks) in relation to the underlying. With every unit change in the price of the underlying asset, the SW price may move very little or remained unchanged.

Are SW with higher premiums bad?

In general, premiums are higher for SW with longer time to expiry and effective gearing levels. You should pick warrants which has sufficient time and effective gearing levels which are in line with your trading strategy. 

What is the break-even price and how to calculate it?

The break-even price is the price you pay for the SW. However, a lot of investors treat conversion price as the break-even price for their SW. Conversion price is only relevant if the SW are physically settled (i.e. convert into actual shares of the company), which is usually the case for company warrants, whereas most SW are cash settled.

Using the call warrant example, the conversion price is:

Conversion Price = (Warrant Price X Exercise Ratio) + Exercise Price
                            = (RM0.075 X 5) + RM2.11
                            = RM2.485

If you hold physical-settled call warrants on ABC, you would only sell when the underlying price is above RM2.48, which is above the current underlying share price of RM2.40. However, when the share price is RM2.40, the theoretical warrant price of ABC-CA could already be RM0.10, which could make you a gain of 33%. Therefore, you should not be too concerned with the conversion price of call warrants. Instead, you should be more interested in the theoretical price of call warrants which can be obtained using Warrants Calculator.

Why is implied volatility so important to SW investors?

Implied volatility is important because it can impact the price of the SW even though the underlying share price remains unchanged. The rise (fall) in implied volatility may mean the market expectation on the increase (decrease) movements from the underlying shares in the future. Implied volatility is constantly changing and may move more often in active SW or when there is a sharp swing in the underlying share or the equity market as a whole.
By comparing the implied volatility of all SW with similar terms over the same underlying share, you can find out if the SW are overpriced compared to other SW.

What is a Market Maker?

Market Maker facilitates liquidity to the SW by posting quotes at both the bid and ask with adequate size at a minimal spread. Liquidity provision by Market Maker creates market depth and enables price discovery according to the price movement of an underlying asset.

The underlying share price of my call warrant has risen sharply, but the call warrant price did not change accordingly. Why is this so?

There are many factors why the call warrant price does not track the upward movements of the underlying shares. Common situations include:

  1. The call warrant is too Out-Of-The-Money;
  2. The call warrant is close to expiry;
  3. The call warrant has very low sensitivity (high ticks).
  4. The call warrant has high Exercise Ratio;
  5. The trading of underlying asset or call warrant has been inactive;

Notwithstanding with the factors above, the warrant price can also be influenced by the supply & demand, market conditions, market sentiments etc.

What will happen to my SW on expiry date?

If the SW is In-The-Money at expiry, you will be paid a Cash Settlement Amount according to the remaining value of the SW. You are advised to read and understand the Base Prospectus, any supplemental documents and the relevant Term Sheet for more details on the settlement method of the SW.

When is the last trading day of the SW?

In accordance with the relevant regulations, the SW will be suspended from trading in the exchange two (2) market days before expiry date. Therefore, the last trading day will be three (3) market days before the expiry date.