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So how am I going to use them?Covered warrants are very versatile. Let's take a trade step-by-step for someone who wants to exploit an expected price rise in a stock. When looking for a warrant ask yourself:
1. By how much do you think the stock will rise?
2. Over what time frame do you think the move will occur?
3. How big a gain do you want and how much risk are you willing to take for it?
Example:
· It's 1 November 2001.
· You think Vodafone will move in a few weeks from the current £1.59
· If you buy the stock then by 19th November when the stock moves to £1.89 you have a 19% gain.
But, what if you did everything with the Vodafone warrant (the 1 year maturity, a £1.75 strike). On 1st November it is £0.203 and on 21 November it is £0.392. You would have made a 93% gain.
It's a higher return at a higher risk than owning the shares. If you wanted to take less risk and so be willing to take a smaller gain, which warrant would you pick? One that is further in the money and/or longer expiry dated. (These terms are explained below).
figure 1
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