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Warrants to options conversion

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derenik

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Hi

I'm looking into how warrants convert to options and backwards.
I assume that buying 1 NAB option contract is the same as buying 4000 NAB warrants where multiplier is 4.

Let's say, NAB stock has warrant:

NABWOG CTW EQUITY CALL CALL 23 Sep 2010 $26.00 4 22/22.5

So strike is 26, multiplier is 4 and price is 22/22.5 (bid/ask)

The corresponding option is:

NABVB8 23 Sep 2010 $26.00 0.545/0.655

So the option quoted has exposure to 1 share and is quoted in dollars (it's not multiplied by 1000 to get exposure of the full contract size). Warrant has exposure to a quoter of a share and is quoted in cents. To convert the warrant to option I multiply warrant price by 0.04 and I get 0.880/0.900. I expected it to be close to 0.545/0.655.

The question is why warrant is more expensive but have much tighter spread?
 
derenik said:
...The question is why warrant is more expensive but have much tighter spread?
Click to expand...

My understanding is because only the MMs can have open sell positions on warrants. This means they keep the IV levels higher which means they get much juicier premiums to sell.

OTOH, options can be bought or sold to open by anyone - not just the MMs. This means the retail trader can put on spread trades to help hedge during periods of high IV.

I have never understood why people would buy normal warrants when they have such high IV levels factored into their pricing when, IMO, options are the better of the two if simply going long.
 
sails said:
I have never understood why people would buy normal warrants when they have such high IV levels factored into their pricing when, IMO, options are the better of the two if simply going long.
Click to expand...

Thanks for your reply, sails.
I think about warrants because they have much tighter spread and lower brokerage. So it could be of benefit when setting up a strangle and closing it out later before expiry.
What are your thoughts on this?
 
Warrants are legalized theft.

Unless you plan to trade on the intraday timeframe, oppies are better off...
Oppie MM's will also hit your order if its close to the midpoint of the spread.
 
derenik said:
Thanks for your reply, sails.
I think about warrants because they have much tighter spread and lower brokerage. So it could be of benefit when setting up a strangle and closing it out later before expiry.
What are your thoughts on this?
Click to expand...

I agree with SkyQuake about the spread and his comments in general...:D

It's more important how close to the mid point you can trade and that can vary between options and also depends on liquidity. I have had some pretty good fills over the years despite wide spreads - and some shockers as well.

I think the brokerage issue would be broker specific. Best thing is to do the sums. How much are you going to save on the spread (don't forget to multiply wattanrs by 4 as in your example). How much extra theta (time decay) are you going to lose on a daily basis with a strangle. Then decide if the few dollars of extra brokerage is really going matter.

Also, if you are going to hold long warrant strangles close to expiry, I would be concerned at the time decay you might lose even on an option - let alone the massive IV pumped into warrant prices.
 
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