Derivatives Warrant is a type of options. They are issued by SCB Securities Co., Ltd. (SCBS). And SCBS distributes derivative warrants to investors in general through public offering. They are listed as fully tradable securities on the Stock Exchange of Thailand.
Types of Derivative Warrants
1. Call derivative warrants; holders of call warrants have the right to purchase (or not purchase) from the warrant issuer a given amount of the underlying asset at a predetermined price within a certain time period.
2. Put derivative warrants; holders of put warrants have the right to sell (or not sell) to the warrant issuer a given amount of the underlying asset at a predetermined price within a certain time period.
How to make the decision for trading the Derivative Warrants
1. To consider the underlying asset to be invested such as A Co., Ltd.
2. To consider timing to invest. Investors should invest when underlying stock prices are going to change. The higher the price fluctuation the greater the potential for the derivative warrant to trade in-the-money.
3. To choose the type of derivative warrants that corresponds to the direction of the selected underlying stocks.
3.1 Based on a bullish view on an underlying stock. Investors should purchase call warrants.
3.2 Based on a bearish view on an underlying stock. Investor should purchase put warrants.
4. To choose the most valuable derivative warrants.
4.1 To choose the derivative warrants with the highest effective gearing.
4.2 To choose the derivative warrants with the lowest time decay.
5. To sell derivative warrants when
5.1The underlying stock price changes as expected. Earn profit according to the value of a derivative warrant increase to a much greater extent than the changes in the price of underlying asset.
5.2The underlying stock price remains unchanged. The value of derivative warrants will decrease over time. Therefore, derivative warrant can potentially loss, the maximum loss to buyers is limited to the initial amount paid for the derivative warrants.
Returns and risks to consider
• Return on investment in derivative warrants will be close to the change in the stock price multiplies the effective gearing and time decay (negative value) each day. Therefore, Investors must consider whether the effective gearing will be worth the time decay or not.
• Risk in case market maker does not provides purchase and sale solutions for investors in order to keep the derivative warrants price at the appropriate value. However, the SET requires that market maker be required to maintain liquidity of not less than 80% of trading time.
• Liquidity risk; investors may not be able to trade derivative warrants in large numbers. Because market maker will provides purchase and sale solutions for investors in order to keep the derivative warrants volume in accordance with the bid and offer volume of underlying stock. Therefore, if the liquidity of underlying stock is low, derivative warrants will not have a high liquidity.
• Tax and fee risks for individual investor; even though trading stock in the exchange market is exempt from capital gain tax, but no tax exempt if the right is exercised. This is because the exercise is an off-exchange transaction. Then the income must be taxed annually under Section 40 (8). In addition, investors have to pay a fee from the trading and exercise fees.
•Investors should invest in derivative warrant is worth more than 0.01 Baht (1 Satang) because derivative warrant has traded at 0.01 Baht could have intrinsic value lower. But because the lowest price on the stock market is 0.01 Baht, it cannot be traded at the intrinsic value. As a result, the return does not change according to the calculated gearing ratio.
•Investors should invest in derivative warrants for short-term trading. Invest in holding no more than 2 weeks (Because the longer the hold. The more the loss from the time decay).
•Investors should invest in derivative warrants less than 3 weeks (due to the near maturity of the derivative warrants, the value of the time decay is very high).
Why DW23 (Derivatives Warrants of SCB Securities Co., Ltd.)
• To increase the likelihood that investors can build a better return from higher gearing ratio.
• Notable is the Price Guideline, which announces the redemption price of the derivative warrants, relative to the price of the underlying stock at a five-day price range. To help investors forecast return, price risks and the period of holding to make a decision before investing.
SCBS Call Center: 0 2949 1999