Click here to view current trading warrants
What Is a Trading Warrant?
Trading Warrants are securitised warrants that can be traded on a Stock Exchange.
There are two types of trading warrants:
Let's assume you want to invest in the mining industry. The "Gold Nugget" mining company looks like a thriving business. As an astute investor, you don't want to miss out on this opportunity. Shares in Gold Nugget are currently $10, which you hope will quickly appreciate to, for example, $15. This would give you a profit of $5. If you are wrong and the share price falls to $7, you would lose $3.
Rather than taking the risk of buying the shares directly, you can buy a share through a Call Warrant on the Gold Nugget share. This may cost $0.80 and gives you the right to buy the share for a predetermined warrant term, at the fixed price of $10.
If the Gold Nugget share does go up to $15 the warrant would be worth at least $5, because the warrant allows you to buy the share for $10 and immediately sell it again for $15. Rather than actually buying and selling the share, however, you would simply sell the warrant itself for $5. After deducting the purchase price of $0.80, you end up with a profit of $4.20.
The down side of a call warrant is if the share price falls. If this occurs the warrant is effectively worthless because no one would pay $0.80 for a warrant with a $10.00 strike price, when the share itself can be bought in the market for $7. If you predict that the share is not going to move upwards, the best strategy is to sell the warrant as soon as possible before expiry, in order to limit any losses. In any case, you cannot lose more than the $0.80 warrant that you paid in the first place for the warrant. When you buy a warrant, you know from the very beginning what your maximum possible loss could be.
Similar to call warrants, if the price went up to $12, the warrant would be worthless because investors could sell the share for $12 in the market, while your warrants is only worth $10. Again, the best strategy if you predict that the price will not go back down before the expiry of your put warrant is to sell your warrants as soon possible. Your risk is always limited to the price you paid for the warrant in the first place, in this case $0.60
This material is made available by Citigroup Global Markets Australia Pty Limited ("Citigroup Global Markets") ABN 64 003 114 832 and AFSL 240992, Participant of the ASX Group. The Financial Products referred to in this document are issued by Citigroup Global Markets. This information does not take into account the investment objectives or financial situation of any particular person. Investors should be aware that there are risks of investing and that prices both rise and fall. Investors should seek their own independent financial advice based on their own circumstances before making a decision.
The terms set forth herein are intended for discussion purposes only and subject to the final expression of the terms of a transaction as set forth in a definitive agreement and/or confirmation. Although the information contained herein is based upon generally available information and has been obtained from sources believed to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. Any prices used herein are historic and may not be available when any order is entered. All opinions and estimates included in this document constitute our judgment as of this date and are subject to change without notice.
This material does not purport to identify the nature of the specific market or other risks associated with a particular transaction. Before entering into a derivative transaction, you should ensure that you fully understand the terms of the transaction, relevant risk factors, the nature and extent of your risk of loss and the nature of the contractual relationship into which you are entering. You should also carefully evaluate whether the transaction is appropriate for you in light of your experience, objectives, financial resources, and other relevant circumstances and whether you have the operational resources in place to monitor the associated risks and contractual obligations over the term of the transaction.
The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor or agent. Therefore prior to entering into the proposed transaction you should determine, without reliance upon us or our affiliates, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences of the transaction, and independently determine that you are able to assume these risks. In this regard, by acceptance of these materials, you acknowledge that you have been advised that (a) we are not in the business of providing legal, tax or accounting advice, (b) you understand that there may be legal, tax or accounting risks associated with the transaction, (c) you should receive legal tax and accounting advice from advisors with appropriate expertise to assess relevant risks, and (d) you should apprise senior management in your organization as to the legal, tax and accounting advice (and, if acceptable, risks) associated with this transaction and our disclaimers as to these maters. If you are acting as a financial adviser or agent, you should evaluate these considerations in light of the circumstances applicable to your principal and the scope of your authority. If you believe you need assistance in evaluating and understanding the terms or risks of a particular derivative transaction, you should consult appropriate advisers before entering into the transaction.
We and/or our affiliates (together, the "Firm") may from time to time take proprietary positions and/or make a market in instruments identical or economically related to derivative transactions entered into with you, or may have an investment banking or other commercial relationship with and access to information from the issuer(s) of financial products underlying derivative transactions entered into with you. We may also undertake proprietary activities, including hedging transactions related to the initiation or termination of a derivative transaction with you, that may adversely affect the market price, rate, index or other market factors(s) underlying a derivative transaction entered into with you and consequently the value of the transaction. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding.
© Citigroup 2012. All Rights Reserved. Citi and the Red Arc Device are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution.