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ADVFN HomeHelpCovered WarrantsCovered Warrants by Alpesh PatelSo how am I going to use them?
Covered Warrants by Alpesh Patel
  So how am I going to use them?
  Pick the right risk/reward profile
  Intrinsic Value
  Time value
  Relationship between the warrant price and the price of the underlying security
  Who is it for?
  Technicalities
  Other strategies
  Tax management
  Freeing Cash
  Conclusion
  What are they?

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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