Using MINIs to trade US shares

Photo of Liz Tian, Citi By Liz Tian, Citi

min read

Popular warrants product allows traders to take a view on market direction.

Global sharemarkets have recovered from the panic that took hold of equity investors in late 2018 as macro events such as trade wars, Brexit and US Federal Reserve interest rate policy direction dominated and drove volatility.

Markets suffered their worst December performance since the 1920s. The sell-off was especially fierce in the technology sector and Apple even lost around US$100 billion from its market value at one point as investors learnt that iPhone sales in China were falling.

So far in 2019, US equities have notched up an almost perfect positive weekly return profile, climbing a wall of worry from trade fears, government shutdown, economic malaise and Fed rhetoric.

Hope is clearly trumping fear and the rally in US markets has benefited global international market indices, including in Australia and across Asia. Major indices such as the S&P 500, NASDAQ, ASX 200, Hang Seng and China CSI 300 have all posted double-digit percentage gains, year to date.

This environment has been well suited to the use of MINI warrants, with the higher levels of market volatility driving investor trading volumes.

Understanding MINI warrants
MINIs enable investors to profit from rising markets with MINI Longs, or falling markets with MINI Shorts, and leveraged exposure to many types of investments, including Australian single shares such as CBA and international indices such as S&P 500, NASDAQ, Nikkei and Hang Seng.

Crossing asset classes, MINIs can also be used by investors to trade fluctuations in commodity prices such as oil and gold, or even take a view of several different currency pairs, with the AU$/US$ proving to be an actively traded pair in December.

Several investment strategies using MINIs proved popular in 2018.

After the volatile last quarter of 2018 there was a strong market bounce in early 2019. The Citi warrants desk saw investors take indexed US equity short positions to hedge for the volatility or trade the momentum of the sell-off.

Late in December some investors started to accumulate MINI Longs to position for a bounce back in US equity markets.

Headline news of Apple’s falling sales, Facebook’s share price decline of nearly 30 per cent and increasing regulatory pressure in 2018 were front of mind for investors trading the technology sector. Those looking to trade the broader sector took positions in the NASDAQ MINI Futures Index and S&P 500 Index MINIs.

The MINI value on the NASDAQ Futures Index is:

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

Example NASDAQ MINI Long

  • NDXKOB strike = 6490
  • NDXKOB stop loss =6797
  • NASDAQ Futures Index Level = 7037
  • FX rate = $0.7090
  • Multiplier = 0.01
  • NDXKOB = ((7037-6490)/ 0.7090)) x 0.01 = $7.72

If intraday the NASDAQ futures index goes up or down by 10 points, assuming the same currency, the MINI value will move by 14 cents (10points/0.7090) x 0.01.

(Example only for illustrative purposes).

Choose stop-loss level
MINIs have a stop-loss feature, so investors should select the stop-loss level most appropriate for them. In the event the level is triggered, the MINI expires and investors have effectively exited their position. They may receive a remaining value on their expired MINI depending on the exit of the position managed by the issuer.

Another benefit of MINI warrants is the transparent pricing. 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 their launch in 2009, the most popular type of warrant in terms of market turnover in Australia.

Alternatively, investors who had a longer-term view and saw the pullback as a buying opportunity, also accessed international markets through instalment warrants issued on international ETFs.

Citi issues instalment warrants from around 30 to 70 per cent geared over popular ETFs by providers such as Vanguard, BlackRock, Magellan, VanEck, SPDRs and BetaShares.

The growing popularity of ETFs has seen Citi issue a growing number of instalment warrants covering names such as MGG (Magellan Global Trust), VTS, (Vanguard US Total Market Shares Index ETF) and WDIV (SPDR S&P Global Dividend Fund).

What’s in store for 2019?
This year is likely to see investors contending with the same concerns of volatility that dominated the end of 2018. Global equities rallying from oversold readings at the end of the year into overbought territory, and renewed US dollar strength is causing investors to question whether markets have moved too far too quickly. They are asking if the January and February short squeeze is over already.

In Citi’s view Markets are likely to remain choppy and volatile until global central banks return with additional quantitative easing as the global economy slows and inflation stalls. Furthermore, the 29 March Brexit deadline and trade war uncertainty will dominate in the first quarter.

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

Investors may look to take a directional view and trade or hedge events such as Brexit through international index MINIS and currencies such as Citi’s AUD to Pound MINI Longs and Shorts, and AUD to Euro Mini Longs and Shorts.

In this environment, it is useful for investors to think of MINIs as a tool to trade a direction: up or down. You can use it to profit from a specific event like the Brexit deadline by taking a directional view; and with world macro events driving markets, MINIs allow investors to potentially benefit from either rising or falling markets, not only locally on the ASX through a broker but also across international markets and asset classes.

About the author

Liz Tian is a Director at Citi Global Markets.
Investors should do further research of their own or talk to a financial adviser before acting on themes in this article. Warrants have different features to suit investors with different needs and risk profiles, although those who use warrants should be experienced investors. Investing in MINIs involves a significant degree of risk. Like any investment that offers the potential for profit, there is a corresponding potential for loss. Investors should refer to the PDS for a full explanation of features and risks.

From ASX

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