Using MINIs to trade your view

Photo of Elizabeth Tian, Citi By Elizabeth Tian, Citi

min read

Learn how this type of warrant helps traders take a positive or negative view on market events.

(The ASX warrants market celebrated its 25th anniversary in late 2016 and as part of that milestone ASX Investor Update is running a series of warrants stories, each focusing on a different portfolio strategy. This is the last story in the series.   To learn more about the features, benefits and risks of warrants and instalments, take the free online ASX Warrants and Instalments course. – Editor)

Macro events dominated a volatile 2016 and the environment well suited the use of MINI warrants, which have been in the Australian market for many years.

They enable investors to profit from rising markets with MINI Longs, or falling markets with MINI Shorts, with leveraged exposure to almost any type of investment – currencies, Australian shares and indices, international indices or commodities.

Several investment strategies using MINIs proved effective in 2016.

Going into the US election, the Citi warrants desk saw the biggest indexed US equity short position in quite a few years. Investors who foresaw a win by Donald Trump wanted to be able to trade that view. Some wanted to potentially hedge an existing share portfolio and others wanted to trade a directional view.

The trade involved shorting the Dow Jones and S&P 500 Index MINIs.

One of the benefits of MINI warrants is the transparent pricing. The MINI value on the Dow Jones Futures Index is simply:

  • MINI Long = (Dow Jones Futures Index – Strike)/ FX * Multiplier
  • MINI Short = (Strike – Dow Jones Futures Index )/ FX * Multiplier

Example Dow Jones MINI Short

  • DJXKOS strike = 21012
  • Dow Jones Dec. 2016 Futures Index Level = 19534
  • FX rate = $0.7497
  • Multiplier = 0.01
  • DJXKOS = ((21012-19534)/ 0.7485)) x 0.01 = $19.74
  • (example only, for illustrative purposes).

On the day of the US election, during our trading session we saw the Dow Jones US futures market plunging as much as 800 points at one point. While there was a tight window to close out the position, we saw most of them do so profitably.

After the Trump win we saw markets rally fiercely. US and international banks rallied on anticipation of a Trump Administration winding back some banking regulations.

Citi warrants desk saw investors go long Australian banks through instalment warrants, instalment MINIs, MINI Longs or Bonus Certificates.

All these warrant types have different features to suit investors with different needs and risk profiles, across the spectrum. Investors who invest in warrants should be experienced investors.

Source: ASX

Closing out 2016 we saw a rebound in commodity prices and large warrants positions in iron ore names such as Fortescue Metals Group (FMG), in which Citi issues around 40 warrants with different features. Investors who anticipate FMG will go up, down or stay flat can trade their view.

As with index MINIs, single-stock MINI Longs have the same transparent pricing:

• MINI Long = Share price – Strike.

So, if FMG was $5 and the FMG MINI Long had a strike of $4.00, the FMG MINI value is $1.00. The MINI moves cent for cent with the underlying security less any interest costs accrued over time.

Investors can, if they assume an index level, holding period, interest rate and currency, calculate to the cent what their MINI value should be worth at a given date in the future.

This pricing transparency has made MINIs since launch in 2009 the most popular type of warrant in terms of market turnover in Australia.

What’s in store for 2017?

There are more political risks on the horizon and related investment opportunities. In Europe, elections in France, Germany and the Netherlands could further impact European market stability. President Trump remains an unknown quantity.

With all this uncertainty, we are predicting continued spikes in market volatility with investors potentially again looking at MINI Shorts to hedge or trade the direction.

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)

Coming into the French elections we could see positions similar to those taken during Brexit.

Investors may look to take a directional view and trade the French election through currencies such as Citi’s AUD to Pound MINI Longs and Shorts and AUD to Euro Mini Longs and Shorts.

Think of a MINI Short as potentially a tool to hedge your existing share portfolio or a way to trade a stock if you think the share price will fall. Or you can use it to potentially profit from a specific view on a market, such as OPEC oil cuts or a currency deregulation.

MINIs remain a good alternative to CFDs (Contracts for Difference). MINIs are less risky as you cannot lose more than you invest in the structure. However, as with all warrants, you can lose all the capital you invest.

Unlike a full recourse loan, you do not have to contribute any further capital and are not subject to margin calls. As the embedded loan within a MINI structure is limited recourse (a CFD is a full recourse), Citi as the warrants issuer wears the gap risk.

Also, MINIs, unlike CFDs, are listed on and regulated by an exchange.

About the author

Elizabeth Tian is Director, Equity Products, with Citi.

Citi is the largest market participant in Australia with more than 2,000 warrants currently on issue, and the widest variety of warrants across the most asset classes. Products include the newly launched Bonus Certificates – the first of their kind with no loan component.

From ASX

Warrants has information on the features, benefits and risks of different warrants on ASX.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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