Skip to content

Types

Warrants fall into two main groups - short-term trading warrants and long-term investment warrants.

For more information complete the warrants online course or download the Understanding trading and investment warrants brochure.

Trading warrants

Trading warrants are short-term warrants, used for either speculative trading i.e. trading the market long (making money from the market rising in value), trading the market short (making money from the market falling in value) or portfolio protection purposes such as hedging your existing investment.

Trading warrants usually use higher levels of leverage than investment warrants, and as such usually carry more risk.

Warrants and Instalments online course

Types of trading warrants

 

MINIs


MINIs

MINIs are the most popular trading warrant and are used by traders looking for straightforward leveraged exposure to shares, indices, currencies or commodities. MINIs can also be used to protect an existing shareholding or portfolio through hedging.

For a fraction of the cost of buying the underlying share, investors can participate in movements in the underlying share as if they were holding them directly. MINIs move on a one-for-one basis with the underlying share, have no expiry date and have an inbuilt stop-loss feature which means investors cannot lose more that their initial investment and will not incur a margin call if the trade moves against them.Unlike traditional derviatives MINIs are not exposed to factors such as option volatility and dividend assumptions.

Traders can buy a MINI Long when seeking to profit from a rise in the underlying asset’s price or buy a MINI Short when seeking to profit from a fall in the underlying asset’s price.

Payoff Diagram

Example
Warrant Code XYZKOC
Underlying Instrument XYZ ordinary shares
Warrant type MINI Long
Stop Loss $37.00
Strike Price $35.00
Underlying Share Price $45.00
Current price $10.00

The example above is a MINI Long over XYZ Ltd ordinary shares. The value of the warrant is the difference between the Underlying Share Price and the Strike Price, in this case Price = Share Price - Strike Price = $45.00 - $35.00 = $10.00. As the warrant is a MINI Long the Stop Loss is set above the Strike Price. If the underlying share price falls to at or under $35.00 a stop loss is triggered.

Example
Warrant Code XYZKOC
Underlying Instrument S&P/ASX 200 Share Price Index Futures
Warrant type MINI Long
Stop Loss 5,400
Strike Level 5,200
Index Multiplier 0.01
Underlying Index Futures Level 5,700
Current price $5.00

For MINIs over indices the Strike Level (rather than the Strike Price) is expressed in index points. The value of the Index MINI is also adjusted by the Index Multipler. Price = (Index Level - Strike Level) x Index Multiplier = (5,700 - 5,200) x 0.01 = $5.00

MINIs versus CFDs

MINIs have certain characteristics in common with contracts-for-difference (CFDs). As mentioned above, they mirror price movements in the underlying share or index, but do not require the trader to pay the full value of the underlying shares, and they offer exposure to falling markets. Unlike CFDs, the trader of a MINI can lose no more than their initial investment due to the inbuilt stop-loss feature.

  MINIs CFDs
No expiry date
Able to trade rising or falling markets
Leveraged
1 for 1 movement with underlying asset
Daily interest
No margin calls  
ASX quoted  

 

Guaranteed Stop Loss MINIs


Guaranteed Stop Loss MINIs

Guaranteed Stop Loss (GSL) MINIs have the added benefit of a guaranteed stop loss level. They are admitted over ASX listed single stocks as well as Australian indices.For all GSL MINIs, the Guaranteed Stop Loss Level is equal to the Strike Price. The Guaranteed Stop Loss feature ensures that regardless of the movement of the underlying asset price, investors are unable to lose more than their initial amount.

Unlike an ordinary MINI there is no residual value available to be paid to the GSL MINI holder if it is terminated. To ensure the Guaranteed Stop Loss a Gap Premium is paid. The amount of the GAP Premium is based on a range of market factors including the volatility of the underlying security, the price of the underlying security relative to the Guaranteed Stop Loss Level, and the future expected dividends.

Payoff Diagram

Example
Warrant Code XYZKOC
Underlying Instrument XYZ ordinary shares
Warrant Type GSL MINI Long
Stop Loss $35.00
Strike Price $35.00
Gap Premium (variable calculated by the issuer) $2.00
Underlying Share Price $45.00
Current Price $12.00

The example above is a GSL MINI Long over XYZ Ltd ordinary shares. Unlike an ordinary MINI the price of the warrant is determined by the following factors

  • Underlying Share Price
  • Strike Price
  • Gap Premium

In this case Price = (Share Price - Strike Price) + Gap Premium = ($45.00 - $35,00) + $2.00 = $12.00.

Equity / Index Warrants


Equity / Index Warrants

Equity / Index call and put warrants are issued over securities (in some cases securities quoted on an Exchange other than ASX) or linked to the performance of a share price index such as the S&P/ASX 200 Share Price Index. These types of warrants can be use to protect an existing shareholding or gain a leveraged exposure to the underlying.

Equity / Index warrants can be Amercian or European exercise style and if exercised can either be settled by delivery of the underlying security or cash. These warrants are frequently traded, particulary when they are short dated.

Payoff Diagram

Example
Warrant Code XYZWOH
Underlying Instrument XYZ ordinary shares
Warrant type Equity call warrant
Expiry Date 28 Dec 2015
Excercise Price $35.00
Exercise Style European
Conversion ratio 3
Settlement Physical delivery

The example above is a call warrant over XYZ ordinary shares. It is a European style warrant with an expiry date of 28 Dec 2015 and an exercise price of $25.00. The holder of three XYZWOH warrants has the right to buy one XYZ share for $35.00 on 28 Dec 2015.

Example
Warrant Code XJOWSE
Underlying Instrument S&P/ASX 200 Share Price Index
Warrant type Index call Warrant
Expiry Date 16 Dec 2015
Excercise Level 5,500
Exercise Style European
Index multiplier $0.005(1 index point = half a cent)
Settlement Cash Payment

For index warrants the exercise level (rather than exercise price) is expressed in index points. If the closing level of the S&P/ASX 200 Share Price Index is at 5,600 on the expiry date you will be entitled to receive a cash payment equal to $0.50 per warrant. This is calculated as the (closing level of the index - exercise level) x index multiplier i.e. (5,600 - 5,500) x $0.005 = $0.50 per warrant.

International Equity Warrants


International Equity Warrants

International equity warrants are offered over securities quoted on an overseas exchange. Hence, although similiar to an equity warrant, the structure raises addtional issues that you should consider. You should speak to your accredited adivser about the additional complexities of these warrants. For example;

  • Time zone difference between ASX's market and the oversseas markets - ie. the home market for the underlying securities may not be open for trading at the same time as ASX's market is open for trading.
  • Delivery of the underlying securities - the settlement, ownership and custodial arrangements in the overseas jusrisdiction will differ from arrangements in relation to ASX quoted securities.
  • ASX supervision - ASX does not supervise or regulate trading in relation to the underlying securities
  • Restrictions on exercise - additional conditions may be placed on exercise, for example, requiring a minimum (large) number of securities to be deliered before the warrants can be validly exercised
Example
Warrant Code AB1WUA
Undelrying Instrument ABC ordinary shares (Nasdaq listed)
Warrant Type International equity call warrant
Expiry date 10 March 2022
Exercise price $0.01
Exercise Style European
Conversion ratio 1
Settlement Cash Payment

The example above is a call warrant over ABC Inc ordinary shares which are listed on Nasdaq. It is a European style warrant with an expiry date of 22 Mar 2022 and an exercise price of $0.01. The holder of one XAB1WUA warrants has the right to receive a Cash Settlement amount calculated as the difference to of the Underlying Share price on the Expiry Date less the Exercise Price. Investors should check the Product Dislcosure Statements for any entitlements to Distribution Amounts as well as the calculation of the Underlyling Sare price on the Expiry Date.

Equity / Index Knock-Out Warrants (Turbos)


Equity / Index Knock-Out Warrants (Turbos)

Equity / Index knock-out warrants (Turbos) are equity / index warrants with a barrier feature that casues the warrant to terminate beofe the original expiry date. ASX differentiates knock-out warrant from other trading-style warrants through the ASX six letter warrant code. ASX denotes knock-out warrants with the fourth letter as X, Y or Z compared to W,V,U or T for other call and put warrants.

In addition knock-out warrants have several characteristics that differ from other trading-stye warrants

  • Changes in implied volatility have little or no impact no knock-out products
  • Knock-out warrants possess little or no time value and have a higher degree of leverage than other trading-style warrants
  • As a result of the possibility that the warrant could terminate before the original expiry date, in addition to the higher leverage, knock-out products are risker than other types of warrants

Payoff Diagram

Example
Warrant code XYZXSE
Underlying Instrument XYZ ordinary shares
Warrant Type Equity barrier call warrant
Expiry date 28 Nov 2015
Exercise price $35.00
Barrier level $35.00
Exercise style European
Conversion ratio 1
Settlement Physcial delivery

In the above example, the holder of one XYZXSE warrant has the right to buy one XYZ share for $35.00 at the expiry date. This is a knock-out call warrant over XYZ shares. It is a European style warrtn that will expire on 28 Nov 2014 and has an exercise price of $35.00. The warrant will terminate before the orginal expiry date if the market price (as defined in the terms of issue) trades at or below $35.00 prior to expiry. In the event that the barrier is hit the warrant will expire prematurely with the warrant value at zero.

 

Investment warrants

Investment warrants appeal to investors looking for medium to long-term leveraged exposure to shares ETFs, A-REITS and a variety of other underlying assets. Several types of investment warrants, specifically instalments, also may provide full access to dividends and franking credits.

Warrants and Instalments online course

Types of investment warrants

 

Instalments


Instalments

Instalments are the most popular type of investment warrant, accounting for more than 95 per cent of investment warrants on issue. In simple terms, instalments are a loan to buy shares. Investors do not have the obligation to repay the loan and will not receive any margin calls.

The unique feature that sets instalments apart from other types of warrants is that you are entitled to dividends and franking credits* paid by the share during the life of the instalment. Instalments are also one of the few ways in which you can use leverage within a self-managed super fund.        

*Investors should seek tax advice to determine if they are entitled to franking credits as individual circumstances may vary.

Instalments are consdiered to have some characteristics of call warrants, giving holders the right to exercise the instalment to received the underlying instrument. Instalments are deemed to be a covered warrant meaining that the underlying instrment is held in a trust arrangement for you benefit by a trustee.

As investors have different needs and financial objectives, innovation has let to the development of many types of instalments. A particular type of instalment may appeal to one's investment objectives compared to another. Therefore it is important to find the most appropriate instalment structure for your needs and objectives.

Instalment Pricing

Example
Warrant Code XYZIMM
Underlying instrument XYZ ordinary shares
Warrant type Instalment
Expiry Date 28 September 2016
Exercise price $21.00
Exercise style American
Conversion ratio 1
Settlement Physical Delivery

In the example above if XYZ's share price was around $35.00 at the time of issue of the instalment then you would have paid about$16.60 for the insatlment (about half of the share price at the time plus funding cost which consists of pre-paid interest and fees). If you want to hold the XYZ shares outright, you can exercise at any time on or before 28 September 2016 to receive one XYZ share per instalment.

Instalments versus margin lending

As instalments are a form of gearing, they are often compared to margin lending. Both approaches provide a geared exposure to underlying securities however there are some important differences to be aware of;

  Instalments Margin lending
Leveraged
Available over most blue-chip shares
ASX quoted  
Available for use in SMSFs  
No margin calls  
No credit checks  
No mandatory loan repayment  

 

Rolling Instalments


Rolling Instalments

Rolling instalments are a variation on the ordinary instalment structure. They have a much longer life (up to 15 years). On a periodic basis (12 -24 months) the instalment will undergo a reset of the loan amount. The reset period is identified upon the issue date and is outlined in the disclosure document on the ASX website.

The instalment is structured so that the interest and borrowing fees are pre-paid only up to the next reset date. During a reset period the issuer will ask the holder to pre-pay the next period's interest and fees up to the next period, of they want to continue to maintain the exposure. At this time the issuer may also adjust the exercise price (often called the "loan amount" of the instalment) with the objective of maintaining a desired gearing level during the life of the instalment.

During the period surrounding each "reset date", investors should take care to consider the effect of a change in the exercise price on the value of the rolling instalment. Information on an upcoming reset can be obtained form the warrant issuer or from ASX.

Self Funding Instalments


Self Funding Instalments

Self Funding Instalments (SFIs) are another variation on the ordinary instalment structure. Like other instalments, you make a partial upfront payment and the issuer loans you the remaining amount. Once you have make your initial payment, generally,there are no additional payments required during the investment term (unless you do not provide your TFN or ABN).

Holders are entitled to dividends (including franking credits), however the cash component of a dividend will be used to reduce the loan amount rather than being paid in cash to the holder, stepping it down The loan amount for a SFI will generally setup every 12 months as funding costs are added to the total loan amount. Hence, over the life of the SFI, the loan amount will periodically decrease due to the payment of dividends from the undelrying instrument, and increase by the amount of funding costs. Ideally the loan amount will progressively reduce over the life of the SFI if the regular dividend payments exceed interest and borrowing charges.

Example
Warrant code XYZSOC
Underlying instrument XYZ ordinary shares
Warrant type Self funding instalment
Expiry date 30 June 2020
Exercise price (loan amount)

$9.50

(16 August 2015)

Exercise price (loan amount)

$9.154

(20 September 2016)

Exercise Style American
Conversion ratio 1
Current price $12.10

In the above example XYZSOC was issued with a loan amount of $10.50 in February 2013. Over time dividends have been paid which have been used to reduce the loan amount. In addition, prepaid interest has been added to the loan amount periodically (generally on 30 June) to reflect the ongoing funding cost of the loan. Taking into account the dividend payments and fund cost, the loan has decrease over a 12 month basis from $9.50 to $9.154, reflecting a positively geared investment. The franking credits continue to be passed to the holder of the instalment.

Stop Loss SFIs


Stop Loss Self Funding Instalments

Unlike the traditional and rolling SFIs all loan proections costs are elimated in the stop loss SFI by the incorporation of a stop loss feature. The stop loss feature is a predetermined level of the underlying share price set by the warrant issuer. This stop loss feature will prevent the value of the SFI from becoming negative. However it is important to note that is this stop loss level is breached, trading in the SFI  will cease.

Stop loss SFIs will alos incur funding costs on a daily basis rather than an annual basis as is the case with the traditional and rolling SFIs.

In the above example the stop loss was set at $28. When the underlying share price reached $28, trading in the SFI stopped. At this point the issuer will calculate if there is any remaining value in the SFI. If there is, you are generally able to sell the instalment back to the issuer and receive a cash payment for that remaining value.

Instalment MINIs


Instalment MINIs

For a faction of a cost, investors are afforded the benefit fo share ownership including any share price appreciation on a one-for-one basis, all distributions or dividends in full as well as associated franking credits.

Each Instalment has a Stop-Loss feature, the level of which is set for each Instalment before it is issued and is typically reset monthly (or at any time at the issuer's discretion). The Stop Loss Level is set at a cetain level above the final instalment. Once the Stop Loss Level is reached, this triggers a Stop Loss Event and the relevant Instalment will expire. Any remaining value will be paid to the Investor.

Instalment MINIs will aslo incur funding costs on a daily basis rather than on an annual basis as is the case with traditional instalments where interest is prepaid until the ealier of the next reset date or the maturity date.