Hello everyone,
Today I would like to focus on what is probably the most widespread and longest existing derivative. I'm talking about the classic warrant.
For me, this is the most demanding product, especially in terms of selection, because there are the most parameters to consider.
I will explain the various parameters using an OS that I currently have active in my portfolio.
Basically, I first have to decide whether to buy a call (rising prices) or a put (falling prices).
Then I have to decide which strike price to choose. This depends on how I expect the price of the underlying to develop. And, of course, the term of the bond.
I usually choose bills that are further out of the money (the strike price is higher than the current price)
In the attached case of the bill on broadcom, the strike price is $325, i.e. over 40% above Friday's price of $225. So the bill is quite far out of the money, but this means that it has a high leverage of currently almost 30. Nevertheless, the position is up over 109%. However, the leverage is not as meaningful with OS as with KO warrants, which is due to the fact that the shorter the term, the more the premium is reduced, so that 1% price increase does not automatically amount to 30% in the warrant.
As a rule of thumb, the shorter the remaining term, the closer the strike price should be to the current price. The risk with OS is not a knock-out, but rather an expiry date on which the bill only has the intrinsic value, i.e. the difference between the share price and the strike price, adjusted for the subscription ratio. If the share price is below the strike price at maturity, the bill would be arithmetically worthless.
The subscription ratio is also important for OS. This means how many OS I need to buy/sell 1 share. In most cases, this is 10:1 or 100:1.
The bill I am trading has a subscription ratio of 10:1 and a remaining term until December. My intention when trading OS is always medium-term, i.e. 3-6 months. I never hold the bills until expiry and almost always take bills that are well out of the money and with at least 6 months to maturity. As soon as my price target is reached, I sell the OS. Another important point in the pricing of OS by the issuer is the so-called implied volatility. This refers to the fluctuation range of the share that the issuer assumes at that moment. This means that the higher the volatility of the share, the higher the premium and thus the value of the OS, without the share having to move. The same applies the other way round, of course.
Personally, I find OS a good addition and would rate them as the least offensive in the derivatives area in terms of risk, behind the discount certificates already discussed in Part 1, as I can also use certificates that are already in the money to limit risk, i.e. the current share price is above the strike price of the OS. If this is the case, the certificate already has an intrinsic value, which is not the case with my certificate below. This of course reduces the opportunity and risk.
So I hope this has helped those interested a little further. If you have any questions, please feel free to ask.
