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?
Â· It's 1 November 2001.
Â· You think Vodafone will move in a few weeks from the current Â£1.59
Â· If you buy the stock then by 19th November when the stock moves to Â£1.89 you have a 19% gain.
But, what if you did everything with the Vodafone warrant (the 1 year maturity, a Â£1.75 strike). On 1st November it is Â£0.203 and on 21 November it is Â£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).