Pick the right risk/reward profileThere are lots of different warrants listed on Vodafone according to expiry date and time value. So how do you pick the best one?
1. Remember greater the risk, then greater the reward.
2. The riskiest ones are the most out of the money and closest to expiry
3. The safest warrants are the most in the money and furthest from expiry.
So depending on which warrant you chose you could have from the same 19% price rise in Vodafone anything from a low risk 25% gain to a higher risk, but more lucrative 200% gain.
That's it. In answering question 3 you have to remember the longer the maturity of the warrant the more expensive it will be and the closer the warrant is to expiry the more it will drop in value.
So if you think Vodafone will rise 25% in 3 months you will not want to buy a warrant that matures in 3 years. Equally, if you think Vodafone will rise by 10% in 2 weeks, you may not want to buy a warrant that expires in just 2 weeks in case you are wrong and the risk of losing your money.
A warrant's price has two elements:
1. Intrinsic value
2. Time value