# Another warrant MM issue



## GreatPig (20 July 2006)

Today I tried a small call warrant trade (my first other than the gold warrant). I was only really hoping for break-even or slightly better, as it was just a trial.

I bought ANZWOH for $0.205 this morning, keeping a limit sale order ready to go at $0.19 in case I had to get out quickly.

Just before closing, it finally pushed up to give the MMs bid of $0.21, which I decided to take. Just as I hit the sell confirm, the MMs bid rose to $0.215 (both with 25K volume, where I had 20K warrants). I then looked with interest to see if I got the $0.215 or only the $0.21.

So I was rather unimpressed to see that 8164 of the warrants sold at $0.19, with the rest at $0.21. How could I only get $0.19 for some of the order when the MM had bids in for $0.21 going on $0.215 - and there were no bids at all at $0.19? The net result was a $63 loss when it should have been a $100 gain (excluding brokerage).

Is this normal, or something I should query with the MM (CTI) or my broker?

Cheers,
GP


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## GreatPig (20 July 2006)

Okay, I decided to query it with the broker anyway (HSBC), and am now aware of another gotcha that I hadn't thought about before (but would have realised if I had thought about it) 

Apparently another seller took out some of the bid volume seconds before my order went through, leaving those 8164 warrants in the bid queue at $0.19, where they immediately got taken by another higher buy order.

So the lesson is, when the bid queue doesn't have any other orders except the MM, don't put in a limit sell order for less than the current bid (or an at-market order) otherwise this could happen.

The $163 lesson... 

Cheers,
GP


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## makeorbreak (20 July 2006)

Hey GP

I too am new to the derivatives market and interested to know why you had traded warrants rather than options?


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## GreatPig (20 July 2006)

Well I'm reading up on options, but am currently only trying warrants because I just happen to have warrants enabled on my trading account already but don't have options. Plus I have warrant price data but no ETO data.

As well as that, I've been getting the Guppy newsletter for a while now and he sometimes discusses warrant trades, but never talks about options trades.

Cheers,
GP


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## makeorbreak (21 July 2006)

I've been looking into installment warrants. My options broker reckons i'd be better off getting a loan. 

I'm not convinced he is right, although considering he is a broker maybe he is


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## dubiousinfo (21 July 2006)

makeorbreak 

Interest on a loan will probably be under 10%. The premium you will pay on most installment warrants will average more than this, depending on volatility etc.

When Zinifex was at $9.80 today, an installment warrant such as ZFXIZ1 (Exercise Price $7.00 Expiry Date 24/1/07) would have cost you $3.55

7.00 + 3.55= 10.55 - 9.80= 0.75 premium

The 75c premium is 10.7% of the share price, over the 6 month life to expiry & equates to 21.4% p.a.

But with warrants you dont get margin calls & your loss is capped at the $3.55 installment price.

There are a lot more pro's & con's. 
Magdoran or Margaret would probably be the best to ask.


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## sails (22 July 2006)

makeorbreak said:
			
		

> I've been looking into installment warrants. My options broker reckons i'd be better off getting a loan.
> 
> I'm not convinced he is right, although considering he is a broker maybe he is



I guess it depends what's in it for your broker.  He may make more in commissions if you purchase the full price of the shares rather than the lower priced warrants.

Anyway, Dubiousinfo has got the right idea in how to work out how much "extrinsic" value in the warrant (which DI has labelled "premium").  The only other thing to remember though is that the cost of a put is also included in the warrant price.  So the 75c in his example would not be entirely interest.

I believe the warrant issuers purchase a put at the same strike and month of the instalment warrant, and so that cost is passed on to the warrant purchaser.  This is what pays for the limited risk trade and so the cost of the put should be deducted before calculating and comparing interest.

If you don't want a limited risk trade and pay for the put, then you may be better off with a margin loan.  But do the sums to see which stacks up the best.

Hope that helps,

Margaret.


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