Warrants are also called warrants, which are warrants in English and are commonly known as "warrants" in Hong Kong. Warrants generally refer to stock warrants. A warrant is a "right" rather than an obligation, which entitles the holder to purchase or sell "related assets" (such as shares, indices, commodities, currencies, etc.) at a predetermined "exercise price" on a predetermined "expiry date" rights. Warrants are often considered spot market products because they are bought and sold like stocks, rather than derivatives such as options and futures. However, warrants also have many characteristics of derivatives, such as it is a very good leveraged investment tool.

There are two types of warrants on the market: general capital stock warrants and derivative warrants.

Equity Warrants: Also known as company warrants, it is a company's fund-raising activity through the issuance of subscription certificates for company shares. Upon exercise, the company issues new shares and sells them to the holders of the equity warrants at the exercise price.

Derivative warrants: generally issued by investment banks. The issuer does not issue derivative warrants to raise funds, but to provide investors with an effective tool for managing their investment portfolios. Derivative warrants are listed securities, are traded on an exchange, and form a contract between the issuer and the holder. The issuer's obligations and the terms and conditions of the warrants will be detailed in the listing document. A covered warrant is a type of derivative warrant in which the issuer deposits the designated securities or assets of the warrant with an independent trustee, custodian or depository as collateral for its performance of obligations, and the trustee, custodian or depository A custodian or depository represents the interests of the warrant holders. However, now covered warrants are often referred to as derivative warrants.

In terms of the rights of the holder, warrants are divided into call warrants and put warrants. Call warrant: gives the holder the right, but not the obligation, to purchase related assets at an exercise price within a specified period. Put Warrant: Entitles the holder to sell the underlying asset at an exercise price within a specified period.

In terms of exercise status, warrants are also divided into European and American warrants. American-style warrants: The holder can exercise his rights at any time from the listing date to the expiration date of the stock warrant. European-style warrants: The holder can only exercise his rights on the expiration date. European-style warrants are the most common type of warrants in Hong Kong, so this column will mainly introduce European-style warrants. Regardless of whether the warrant is European or American, investors can sell the warrants they hold in the market before the expiration date. In fact, only a small number of warrant holders will choose to exercise their warrants, while most investors will sell their warrants before expiration.

The following uses three examples of purchasing properties to illustrate:

The basic concept of exercise rights

Assume that the reader holds a right that can be exercised in real time. Purchase a designated property for NT$1 million. The value of this right is most directly determined by the price of the property. If the current price of the property is 1 million yuan, then this right is basically worthless, because having this right or not will not bring any "discount". But assuming the price of the property is 1.2 million yuan, then the value of this right is 200,000 yuan. If this right is sold on the market, the best price in the market will be 200,000 yuan.

The impact of term length on exercise value

Assume that the current price of the property is 1 million yuan. The reader has two different rights. One is the right to be exercised immediately, and the other is the right to exercise immediately. The property is purchased for 1 million yuan, and the other is a right that can be exercised after one year. The property can also be purchased for 1 million yuan. If these two rights are sold in the market, the right that can be exercised immediately is still worthless, because having this right will not bring any "discount"; but the right that can be exercised after one year will add a "time" "value", because there will be some other people in the market who expect that the property will be worth more than 1 million yuan in one year, and are willing to pay some value to purchase this right, which will be exercised after one year, or even one month or two months later. Later, when the market price of the property rises above NT$1 million, they can sell the right at a higher price to other investors who expect that the property price will continue to rise.

A right with a one-year term will be more valuable than a right with a term of only half a year, because the longer the term, the greater the chance of exercising the right.

The impact of asset price volatility on the value of exercise rights

Suppose there are two properties with the same price of 1 million yuan. One of them is located in the central area, and the price has always gone up and down; the other one is in a remote countryside, and the price has never gone up or down in the past ten years. Assume that the reader has two rights and can purchase these two properties for 1 million yuan one year later. If these two rights are put on the market, which one will be more valuable? Of course, the one connected to the central property! Because the prices of properties in remote rural areas have not fluctuated over the past ten years. On the contrary, although the prices of properties in central areas may rise and fall, as long as there is an opportunity to exercise the right, the right will be valuable.

What do the above three examples illustrate when it comes to pullback warrants? A warrant gives the holder the right to buy or sell at a specific exercise price on a specified date. Related Assets. The price of a warrant is basically affected by the price of the underlying asset, the time to expiration and the price volatility of the underlying asset. One of its characteristics is that a warrant "amplifies changes in the price of the underlying stock", but essentially a warrant is a "right" and its value depends on "how many chances this right has to be exercised."

After the positioning is clear, we can analyze how to make profits by buying and selling this right. (Société Générale Securities Hong Kong Li Songci)

The value of a warrant consists of two parts: intrinsic value and time value. Intrinsic value refers to the difference between the price of the underlying asset and the exercise price, which is the profit received when the warrant is exercised. This also leads to the concepts of "parity", "in-price" and "out-of-price". Intrinsic value is equal to the positive difference between the strike price and the current price of the underlying asset, after taking into account the conversion ratio.

Intrinsic value of each unit of put warrant = (strike price - underlying asset price) / conversion ratio

Since the intrinsic value of the warrant cannot be a negative number, if calculated is a negative value, it is replaced by 0.

How to operate:

Warrants are divided into warrants and put warrants. The warrant stipulates that the holder has the right to purchase relevant securities from the issuer at an agreed price within a specified period or on a specific expiration date. When the market price of the stock is higher than the subscription price when the option is exercised, it is called in-the-money, and investors can obtain the price difference. On the other hand, if the market price of the stock is lower than the warrant price when the option is exercised, it is called out-of-the-money, and investors will not earn a penny, and the warrant will be like a piece of waste paper. For example, in Baosteel's stock warrants, the company's subscription price is 4.5 yuan per share. If the equity is 5 yuan when exercised, you can earn 0.5 yuan per share. If the stock price of Baosteel is only 4 yuan upon exercise of the warrant, it will be impossible to make money.

A put warrant is the exact opposite of a warrant, which stipulates that the holder has the right to sell the underlying security to the issuer at an agreed price within a specified period or on a specific maturity date. As promised in the launch of agricultural products, major shareholders will repurchase shares at 4.25 yuan per share upon maturity. When the market price of the stock is lower than the put price when the option is exercised, it is called in-the-money, and you can earn the price difference; conversely, if the market price of the stock is higher than the put price when the option is exercised, it is called out-of-the-money, and you will not earn a penny from the put warrant. It also became a piece of waste paper.

Speculating in warrants is like speculating in stocks

Warrants can be bought and sold freely in the market, and investors can earn the price difference by selling high and buying low. The price of a warrant is determined by its intrinsic value and time value, so you should pay attention to its underlying stock price and remaining duration. Specifically, when the stock price rises, the call warrant price rises accordingly, and the put warrant price falls. On the contrary, when the stock price falls, the call warrant price falls and the put warrant price rises. For example, in Baosteel mentioned above, when the stock price rises from 5 yuan to 6 yuan, since the subscription price is fixed at 4.5 yuan, the price of the subscription certificate will also increase by 1 yuan accordingly, and the theoretical price is 1.5 yuan. On the contrary, if the stock price drops to 4.6 yuan, its theoretical price is only 0.1 yuan.

Since the longer the remaining duration, the greater the change in the stock price may be, the greater the possibility for investors to make money, so the greater the value, and vice versa. If Baosteel will exercise its rights next year, but this year's stock price has fallen below the exercise price of 4.5 yuan, that does not mean that the price of the subscription warrant is zero, because it still has the possibility of rising to last year, so the market price of the subscription warrant may be Split the money.