Warrants vs. Options vs. Other Instruments

[cuttlefish]

Re: Warrants v Options v other instruments

Options are exchange traded instruments which are traded on exchanges and are regulated by the ASX/SFE and are government backed.

Magdoran - I think you've answered a question I was planning to ask in the options mentoring thread - which was "what happens if you buy an option but the options writer fails to settle/deliver at exercise time (because the writers losses exceeded the lodged margins and they didn't have the extra capital to make up the difference)."

From the comment above I'm assuming that there is protection from this.

 

[Magdoran]

Re: Warrants v Options v other instruments

Hello cuttlefish,


Options traded on both the ASX and SFE are transacted through a clearing house, and go through a process called “novation” where both sides of the trade are effectively taken over by the clearing house.

Essentially you deal through your broker, and the clearing house takes over the contractual relationship, so if the original party you transacted with reneges, you are not effected (unless the whole system falls over – which is highly unlikely).

The clearing house is usually a separate entity to the exchange by the way, but there are a whole series of complex protections in place.

This is not the case for OTC instruments like warrants.


Regards


Magdoran

 

[wayneL]

Re: Warrants v Options v other instruments

Magdoran - I think you've answered a question I was planning to ask in the options mentoring thread - which was "what happens if you buy an option but the options writer fails to settle/deliver at exercise time (because the writers losses exceeded the lodged margins and they didn't have the extra capital to make up the difference)."

From the comment above I'm assuming that there is protection from this.

Hi Cuttlefish,

In the US. the OCC (options clearing corporation) gaurantees the performance of all options contracts. I presume the ACH does the same.

I'm sure Mag will expand on that.

cheers

 

[GreatPig]

Re: Warrants v Options v other instruments

Lots of fun to be had there for you

Yeah, right.

Thought you might be interested in this extract from Cox & Rubinstein. Exciting reading!

(it looks curved because it was taken with a digital camera & I couldn't keep the page flat while taking the picture).

GP

 

[robots]

Re: Warrants v Options v other instruments

hello,

if options/warrants/cfd's are what their cracked up to be, then lets see someone post some fair dinkum results of trading stradegies using these instruments.

posts can be done after ASX/SFE trading hours.

promoters of these stradegies "can" directional investors, although I'm sure plenty would of liked to have had money on CBA or WOW over the last 15 yrs

these instruments do nothing but line the pockets of the institutions offering/servicing them.

thankyou
robots

 

[sails]

Re: Warrants v Options v other instruments

Yeah, right.

Thought you might be interested in this extract from Cox & Rubinstein. Exciting reading!

(it looks curved because it was taken with a digital camera & I couldn't keep the page flat while taking the picture).

GP

LOL - I think you will find Guy Bowers book a much easier place to start! There is good (and some free) software out there to do all those complicated mathematics.

I see option trading much like driving a car. One needs to know the rules, how to handle the vehicle and know it's performance under certain conditions - but it's not necessary to know the complicated mechanics and electronics before learning to drive.

However, if you enjoy studying up on the mathematical models - have fun!

Also I have Sheldon Natenburg's "Option Volatility & Pricing" as well as Lawrence McMillan's "Options as a Strategic Investment" and both are excellent reference books. I borrowed David Caplan's "The New Option Secret - Volatility" from the Library a couple of years ago and found it had a lot of practical strategy ideas in it - found it very helpful in understanding volatility.

 

[wayneL]

Re: Warrants v Options v other instruments

LOL GP

All I can say is "thank God for software"

Margaret advise is best. You don't really need to know the maths... not that maths anyway. I still couldn't find my way through that lot.... and have no desire either

Cheers

 

[wayneL]

Re: Warrants v Options v other instruments

hello,

if options/warrants/cfd's are what their cracked up to be, then lets see someone post some fair dinkum results of trading stradegies using these instruments.

posts can be done after ASX/SFE trading hours.

promoters of these stradegies "can" directional investors, although I'm sure plenty would of liked to have had money on CBA or WOW over the last 15 yrs

these instruments do nothing but line the pockets of the institutions offering/servicing them.

thankyou
robots

Hi Robots,

Though your comments re promoters pretty much score a direct hit, ("most" promoters are scam artists) the rest of your comments are not accurate.

Only scumbag charlatan lowlife non-trading seminar clowns would ever can directional strategies.

The beauty of options is that there is a whole bag of tricks available depending on your view. If an option investors view is that a stock is going to trend in a particular direction, then he/she would be a fool to go delta neutral.

I am a real fan of non-directional gamma negative strategies on indicies, but not really on stocks... but will go gamma positive if the planets line up the right way.

On stocks/futures I use the whole trickbag, depending on my view.

The key Robots, is knowledge. GP is going the right way about it, by acquiring knowledge. Many do fail however, and the fault can be laid squarely at the feet of the lack of knowledge... along with normal trading issues such as money management etc

Most of the miserable seminar hypsters do little towards alleviating this problem. In fact, exacerbate it by injecting motivation into the mix. Dangerous.

There are a minority of very good ones however and ythe existence of cowboys shouldn't reflect on the instruments themselves

Cheers

 

[Magdoran]

Re: Warrants v Options v other instruments

Hello GP,


Love it! You are having fun aren’t you? Well, there are some options enthusiasts that just love to get into the nitty gritty of options modelling… and I’ve met a few.

Margaret summed it up elegantly with the car analogy, and Wayne was right on the money when it comes to software.

You really don’t need a PhD in mathematics or need to know all the mathematical formulas behind options models like Binomial or Black and Scholes to trade options effectively.

Regards


Magdoran

 

[GreatPig]

Re: Warrants v Options v other instruments

Magdoran,

You said you've traded both options and warrants extensively. From a number of other comments here and elsewhere, warrants get a bit of a bagging as being a rip-off.

What sorts of situations are there where you think warrants are more suitable than options (specifically trading warrants)?

Cheers,
GP

 

[Magdoran]

Re: Warrants v Options v other instruments

While I don’t really want to validate “robots”’ tone (and grammar), the poster does make an important point.

Derivatives are high risk instruments if not utilised correctly, and if not managed appropriately may lead to financial ruin. Derivatives by their nature are involved and complex, and need to be carefully understood on a whole range or levels.

Wayne correctly points out that there are unscrupulous organisations which promote questionable approaches, and investors/traders need to be aware or this.

Success in trading shares, let alone in derivatives is not easy to achieve. Anyone embarking on using options should recognise the real risks involved and not approach trading them lightly.

For the newer players, my advice is to take your time, study and paper trade a lot, and recognise that trading derivatives effectively can take years to master. I firmly suggest taking 12 months if new paper trading, or at least try trading with very small positions.


Regards


Magdoran

 

[Magdoran]

Re: Warrants v Options v other instruments

Hello GP,


There are many variables to your question, so I’ll try to answer simply at first just to illustrate some ideas… again, this is not financial advice, just generic potential strategies which may or may not be suitable for investors/traders.

Instalment/Endowment warrants can work well for long term investments (an example could have been buying ZFX when it was around $2.90, or BHP a couple of years ago).

The advantage is that the holder can reap dividends from the leveraged warrant, and also increase their holdings at rollover/reset dates as the value grows. But this assumes a strong bullish market (in this case driven by strong commodity performance).

The danger though is the leveraged exposure if you get it wrong, and the ongoing interest rate cost if you hold through reset/rollover dates (although these may be tax deductible – suggest you seek professional advice on this).

You could also be using supporting options strategies around this.

Another approach is dividend stripping, where you buy a bullish stock with a dividend yielding warrant, and sell at a later point after ex-div aiming for a profit. The holder then receives the dividend, but if the leverage was 10:1 for instance, you’d receive 10 times the dividend compared with an equivalent amount of money invested in shares, plus any trading profits. The danger is that the stock doesn’t recover sufficiently to cover losses and the dividend, so needs to be carefully executed.

Just some food for thought GP – hope that helps, but there is much much more to this.

Time for bed!


Regards


Magdoran

 

[sails]

Re: Warrants v Options v other instruments

... From a number of other comments here and elsewhere, warrants get a bit of a bagging as being a rip-off. ...

GP, as we all understand, warrants are bagged because people have been hurt by them. Some for the reason that Magdoran has pointed out with too much leverage which is also applicable for CFD's and options.

The other reason is that many do not really understand where the other risks are lurking. As warrants (all types) can only be written by the warrant market makers, they have two main tactics to make money - one is to pump up the premium creating a high extrinsic component over and above interest rates - and the second one is to widen the bid/ask spread.

Once these risks are understood, it makes it easier to decide if a warrant is a good deal or not. The volatility component of either options or warrants would have to be the least understood cause of loss when trading either derivative.

Another thing is that different issuers have different conditions. For example, some time ago I wanted to purchase instalments on MAP prior to one of their dividends. I ran my calculations through the all series available and found that one of the issuers had quite low extrinsic value with about margin lending rates of interest and no extra volatility component. Their bid/as spread was very tight. OTOH, one of the other more popular issuers was all over the place with bid/ask spread and had fattened their volatility component with a similar strike and expiry month as the other issuer.

Just my

 

[robots]

Re: Warrants v Options v other instruments

hello

if there are these brilliant strategies with options, warrants then lets see them.

thats all I am questioning.

people talk about all sorts of things here so throw up some real techniques so people can learn.

lets see the real risk and reward for using these these instruments

hows this for risk and reward, $10,000 invested in Westfield Trusts in the seventies now worth many millions

thankyou
robots

 

[markrmau]

Re: Warrants v Options v other instruments

if there are these brilliant strategies with options, warrants then lets see them.

I think BHP will form a bottom some time in the next week possibly after dropping a further 5%. I intend to buy BHP call warrants when I think it has bottomed. Possibly BHPIZ3.

Simple as that.

 

[professor_frink]

Re: Warrants v Options v other instruments

hello

if there are these brilliant strategies with options, warrants then lets see them.

thats all I am questioning.

people talk about all sorts of things here so throw up some real techniques so people can learn.

lets see the real risk and reward for using these these instruments

hows this for risk and reward, $10,000 invested in Westfield Trusts in the seventies now worth many millions

thankyou
robots

You could always go out and buy a couple of books on options trading robots. The strategies that some people here mention aren't secrets that only a few people know, you can find out for yourself if you want

 

[wayneL]

Re: Warrants v Options v other instruments

hello

if there are these brilliant strategies with options, warrants then lets see them.

thats all I am questioning.

people talk about all sorts of things here so throw up some real techniques so people can learn.

lets see the real risk and reward for using these these instruments

hows this for risk and reward, $10,000 invested in Westfield Trusts in the seventies now worth many millions

thankyou
robots

Hello Robots

Techniques are dotted throughout this forum and as Frink suggested, there are books...

Westfield huh? Well now, that would have been a good investment, and long term holders could have enhanced that investment at appropriate times with the simple and popular strategy of writing covered calls.

But generally the active option player is a trader as opposed to an investor.

Google "condor option spread" to see one of my favourites for playing the indexes.

But you'll have to do some work yourself to figure it out.

Cheers

 

[sails]

Re: Warrants v Options v other instruments

hello

if there are these brilliant strategies with options, warrants then lets see them.

thats all I am questioning.

people talk about all sorts of things here so throw up some real techniques so people can learn.

lets see the real risk and reward for using these these instruments

hows this for risk and reward, $10,000 invested in Westfield Trusts in the seventies now worth many millions

thankyou
robots

Robots, I don't see option or warrant strategies being any more brilliant than any other sort of trading - they are just different. Certainly, seminar/course spruikers make them sound like they are sure winners, but in reality is not so. Money management, etc is vital to success in any type of trading no matter what the vehicle used.

There is a lot on this thread about where the risks are in option and warrant trading and don't remember that these types of trades are recommended as being easy or as a type of holy grail on this thread. They are not for everyone, however, those who do gravitate towards this type of trading really need to understand what they are getting into as they are not risk free.

If you still want to know what the basic strategies are, suggest you check out Guy Bower's book which explains them including clear illustrations of payoff diagrams which shows risk and reward for each strategy. There are quite a number of strategies as well as many variations of those strategies, so not really practical to try and re-write a whole book here

 

[wayneL]

Re: Warrants v Options v other instruments

Robots, I don't see option or warrant strategies being any more brilliant than any other sort of trading - they are just different. Certainly, seminar/course spruikers make them sound like they are sure winners, but in reality is not so. Money management, etc is vital to success in any type of trading no matter what the vehicle used.

There is a lot on this thread about where the risks are in option and warrant trading and don't remember that these types of trades are recommended as being easy or as a type of holy grail on this thread. They are not for everyone, however, those who do gravitate towards this type of trading really need to understand what they are getting into as they are not risk free.

If you still want to know what the basic strategies are, suggest you check out Guy Bower's book which explains them including clear illustrations of payoff diagrams which shows risk and reward for each strategy. There are quite a number of strategies as well as many variations of those strategies, so not really practical to try and re-write a whole book here

Hi Sails,

You really know how to cut through the crap succinctly and without fanfare.

Spot on, and good post.

Cheers

 

[robots]

Re: Warrants v Options v other instruments

hello,


"But generally the active option player is a trader as opposed to an investor" WayneL

I'm sure the trader/investor is looking for the same thing here - money

looked into condor option spreads on the S&P500 with futures broker but found brokerage too high in Aus and risk too high for payoff

if taking both legs, yes you cannot be down on both

i guess you look for the sideways trend

thers's a few people promoting this technique, indextra and optioneer etc in Melbourne with them linked fairly closely with brokers

been reading about options for several years , looked at books at bookshop but found most info on the internet

just a bit of luck if you had Westfield or other I guess

thankyou
robots