Warrant basics-summary field introduction

Warrant Basics-Summary field introduction

1. The Formula for Outstanding quantity distribution is:

Outstanding quantity distribution = Outstanding quantity / Circulation*100%

It refers to the warrant held by other investors in the market as a percentage of total circulation. Circulation is the inventory quantity that can be sold at the time a product is issued by a issuer. When the product goes to market, other investors buy and hold it, so the outstanding quantity will increase. If the outstanding quantity distribution is high, the pricing power of the issuer will be affected, and then supply and demand factors will have the opportunity to take precedence over other factors, affecting the price of the warrant, and the price fluctuation of the warrant will be more drastic.

2. Premium

Call Warrant premium = (strike price + call warrant price * entitlement ratio - underlying stock price)/ underlying stock price *100%

Put Warrant premium = (strike price + putwarrant price * entitlement ratio - underlying stock price)/ underlying stockprice * 100 %

The premium is how much the underlying stock would have to rise or fall to break even when an investor buys a certain warrant at its ruling price and holds it to expiry date. When choosing stock warrants, the smaller the premium, the greater the chance of winning, undoubtedly, there are other factors to consider.

3. Entitlement ratio

It refers to the number of warrants held by the warrant holder in order to be entitled for one underlying stock. For example, the entitlement ratio of certain Call Warrant is 100, that is, for every 100 stock warrants held by the investor, the investor is entitled to exchange for one underlying stock.

4. Strike price

It refers to the price of the underlying stocks bought (call warrant) or sold (put warrant) by the warrant holder at the expiry date.

5. Gearing

Gearing = underlying stock price/ (the warrant price *entitlement ratio).

The gearing shows the multiple proportions of warrant price and the underlying stock price. The higher the gearing, the higher the investor's profitability and, of course, the greater the risk of loss.

6. Break Even point

Break Even point of call warrant = strike price + call warrant price * entitlement ratio

Break Even point of put warrant = strike price - put warrant price * entitlement ratio

Break Even point means how much the underlying asset price needs to rise / fall if the investor buys and holds the warrant until the expiry date, so that the investor can break even.

7. Expiry Date & Last trading date

At the expiry date, warrants will face the expiration settlement and will no longer support trading. Trading would terminate 4 trading days before the expiry date, which is the "last trading day" in the App / Client.

As a supplementary instruction, The settlement price at the time of settlement of the warrant, in the case of a stock warrant, shall be the average closing price of the relevant stock for the 5 trading days before the expiry date of the warrant (the closing price on the expiry date is not included); In the case of index warrants, the settlement price shall be subject to the EAS published by the SEHK. The EAS is the 5-minute average price of the Hang Seng index on the date of maturity.

Stock warrants

1. Effective gearing

Effective gearing = [the latest price of underlyingassets / (the latest price of stock warrant * entitlement ratio)] * delta

Effective gearing means how many percentage points the warrant price would theoretically rise (subscribe) or fall (put) if the underlying asset price rose 1 per cent, other factors affecting the price of the warrant remaining constant.

2. Delta

Delta is used to measure the sensitivity of the theoretical price of warrants to changes in the price of the underlying asset. Delta of the call warrant ranges from 0 to 1, they change in direct proportion, and that of put warrant is from -1 to 0, the change is inversely proportional. 

If the delta ratio is closer to 1 or -1, it indicates that the warrant price is more in-the-money; If the delta ratio is closer to 0, it indicates that the warrant price is more out-of-the-money; The closer the delta ratio is to 0.5 or -0.5, the closer the warrant is to equivalence.

Another meaning of delta is to reflect the probability that the warrant will become in-the-money when it expires. The lower the value, the higher the investment risk and the higher the potential return.

3. Implied volatility

Refers to that plug the market price of warrants into the warrant pricing model (such as Black-Scholes model), and the value of volatility obtained by backward extrapolation can be understood as the market's expectation of the volatility of the underlying stock in the future warrant duration. The implied volatility is positively correlated with the price of warrant. That is, in the case of other conditions unchanged, the greater the implied volatility, the higher the price of warrants (whether call or put).

Callable Bull / Bear Contract

1. Call price

CBBC features a mandatory call mechanism. When the underlying asset price of the CBBC touches the call price before the CBBC expires, the CBBC trading will be suspended, a Mandatory Call Event will take place to the CBBC, and CBBC will be settled.

2. Gap percentage of call

It refers to the percentage of gap between the CBBC call price and ruling price of the underlying asset. 

Gap percentage of call=(the CBBC latest price of the underlying asset—Call price) / Call price*100%