Wading through the endless list of instalment warrants

[shady]

How on earth do people choose an installment warrant out of the long list?
For instance I'm looking at Woodside Petroleum (WPL) and there's dozens of self funding/installment/mini all with different expiry dates strike prices and so on. Is there a table or calculator or something to compare the different products? I assume different providers price their products cheaper/dearer.

Cheers

 

[Boggo]

There isn't really a long list if you work out how they behave and what suits your purpose.

I am assuming that you understand Delta, Expiry and Ratios etc, if you don't then start with them first.

I mainly use warrants in my SMSF (currently on BOQ, NCM and TLS) and instalment warrants with a high delta and and six to twelve months to expiry are my preference.

You need to do some basic calcs on how much the warrant will cost you if you were to hold it to expiry, fairly simple process.

Lets look at WPL (while bearing in mind that I have just got home from dinner where beer and reds were involved), in this case WPLIOV - an instalment that expires on 15/12/15.

To buy that at the close today you would pay the ask of $13.12. The final instalment is $23.65, so $23.65 + $13.12 = $36.77, that is what the underlying would cost you if you were to hold to expiry and then purchase the share (I never purchase the share).

Now, the current price of WPL at the close today was $34.16 and it is going to cost you $36.77, so to hold the warrant to expiry it will cost you $2.61 (the premium).

This warrant has a Delta of 83.8, that means that for every dollar that WPL goes up the warrant will go up $0.838, so if my rough calculations are correct WPL needs to go up by $3.11 by the 15/12/15 for you to break even (ignoring brokerage).

Effectively that $2.61 premium is in constant decay and will be zero at expiry, if the stock stays at the same price as it is today you will lose the premium as the bid at expiry should have no premium(there are tax etc issues that I won't go into).
As a rough rule of thumb it will lose two thirds of its value in the last one third of it's life (life being the period from when you bought to expiry).

A consideration through it's "life" are the dividends you may collect along the way, if they are fully franked and you hold the warrant in a SMSF where you pay 15% tax then you also get a tax credit while you get the full dividend as if you owned the share, a factor to consider as an offset against the decay.

Fantastic products but not for the fainthearted.

I hope this rough guide is a help, there are other factors to consider but that is the basic concept.

PS - I will probably read this tomorrow and think ****, what have I written, that is misleading, for now hope it helps though. :bier:

 

[shady]

Thanks for the reply Boggo,

I've pretty much got all that and am at the stage where I would like to buy a few. Going through the list of WPL warrants, of the 4 pages noted on the ASX website (it doesn't display delta on their site) I've attached an image showing just one page which has 15 or so installment warrants or self funding installment warrants with expirys dated from Sept 2015 to June 2017. They're all a 1:1 ratio with different strike prices and gearing levels.

So which in?...I suppose I'm wanting to know if all the issuers charge the same interest and insurance for each product given that fact that they all have different time to expiry and gearing levels. And if they dont charge the same, Is there a chart that displays all of these with their gearing levels and delta? I can work out the premium paid as you have above and the number of days to expiry but doing that for each of a dozen or so warrants over 3-4 stocks gets a bit time consuming, there's got to be an easier way.

Thanks again for the reply.

 

[shady]

Oh, forgot to ask....If I find a warrant to buy is there going to be a seller? or is it best to find a warrant that actually has a seller at a price?

 

[shady]

....Bit the bullet and jumped in. No better way to learn then make mistakes.

Lets see how much I can loose on this one before going in again. I would have preferred to go in a little larger but still don't fully understand the process of comparing different products to select the best value product.

WPLSOE...Thought I'd just dip my toe and bought 250 @ $17.47 each
CitiWarrants Self Funding strike price is $16.40 and expiry 23/06/16
They have a delta of around .95 and gearing level of just under 50%.

If I add the buy price of $17.47 and the strike price of $16.40 I end up with $33.87 on a stock currently trading at $33.67, a premium of just 20cents...does that seem right?

On the attached image showing the holdings on commsec I can understand the difference of the 'purchased price' of $17.59 compared to the actual price I paid of $17.47, the difference being the $29.95 in brockerage but whats up with the Change($) of $-1.63 and Change Value ($) of $-407.50??? I assume it may be based on the underlying stock price???

Can you more experienced people than I, show me the error of my ways and point out things I didn't take into consideration...

 

[Boggo]

Oh, forgot to ask....If I find a warrant to buy is there going to be a seller? or is it best to find a warrant that actually has a seller at a price?

That question tends to indicate that you need to do some more reading.

....Bit the bullet and jumped in. No better way to learn then make mistakes.

Can you more experienced people than I, show me the error of my ways and point out things I didn't take into consideration...

Jumping in, you won't learn from that imo, that's gambling.
Based on previous cases I have seen here and elsewhere you run the risk of being on here in six months telling everyone that derivatives are a scam and that the market makers are thieves.

The "error of your ways" imo is that you are not sure of what type of warrant you want to trade and until you work that out and then you cannot apply the associated figures to that particular derivative.

On the warrant you bought and without looking it up can you tell me what the "S", the fourth letter in the warrant name indicates.
That letter (S) does have a significant change to everything that I explained in my post above.

You need to be able to glance at that list you have above and tell what the last three letters on each mean, in particular the fourth one, that is how you immediately narrow the field to your preferred warrants.

 

[shady]

Thanks for taking the time to respond Boggo.

Need to do a lot more reading or learning. I've read that the issuer is the 'market maker' but not really sure how that works. Do they just issue the 10000 (or however many)warrants in a series and then let the market determine the price and liquidity or do they keep some one hand just in case others want to buy in the future just like I did. So my little parcel would have been purchased from the issuer or from another individual seller?

I was aware that the fourth letter means that its a self funding warrant....the fifth issuer and last is the series.
understand that the dividends will pay the interest component as in the diagram attached. Given the fact the the stock is about to go ex dividend

What I cant work out is why the dozens of other self funding warrants had a much higher premium, in some instances up to $4-$5. I assume the premium on a self funding is more about the insurance (or put option) that the issuer places but still, a 20cent premium tells me I'm probably missing something with the warrant I purchased. Given the fact the the stock is about to go ex dividend and that the issuer will keep this as interest payment, is this the part I'm missing?

What type of warrant do I want to trade...I'm wanting long dated (12 months or more) and something not too heavily geared around the 50% that closely matches the movement in the underlying share price so I looked for a high delta >.90

I've found a bucket load of 'generic' information on installment warrants explaining what they are and to a certain extent how they work. I have found very little information on how to select a particular warrant.

Thanks again for your time and any comments/advice/help.

 

[John Swift]

Jumping in, you won't learn from that imo, that's gambling.

Based on previous cases I have seen here and elsewhere you run the risk of being on here in six months telling everyone that derivatives are a scam and that the market makers are thieves.

I think you actually learn more from jumping in. Just because it's gambling doesn't mean you don't learn anything. It's just a more expensive lesson.

Please keep us up to date with how this goes shady.

 

[shady]

Please keep us up to date with how this goes shady.

Will do.

After cogitating on it a little further I have more questions than answers.

- If it was the issuer that sold me the warrants is the issue date todays date for the calculation of interest? or is it the date of the original issue being 13th July 2011? I suppose what I'm asking is, is interest calculated and added on the anniversary of my purchase of the warrant or the anniversary of the original issue date?

- Is the issuer always on the other end of a warrant transaction? Or do traders/investors make up a buyer and seller of a warrant as is the case with buying shares?

 

[shady]

More reading and it seems I've answered one or two of my questions.

Who'd of thought to read the pds!!!
Well looking through it, it seems as though when the pds was written the strike price for WPLSOE was close enough to $18.95, It's now down to $16.40 so that leads me to believe that since the pds was prepared the dividend has paid down the loan amount by $2.55 since the July 2011 issue date. That means of the ~$6.55 in dividends paid since 2011, ~$4.00 of it has gone to pay interest while the remaining $2.55 has reduced the strike price???

How am I going? On the right track or way off the mark?