Investment Gamble = Call Warrant
Monday, October 25, 2010 | | 0 comments |Let’s say company XYZ shares are currently priced at RM10 per share. To purchase 1,000 shares which is equivalent to 10 lots, an investor would need RM10,000. However, if the investor opted to buy a call warrant (representing one share) that was going for 50 sen per call warrant, the investor could enjoy the right to own 20,000 shares with the same RM10,000, and be highly rewarded if there is a rise in price!
Because the prices of call warrants are low, the leverage they offer is high so there is a potential for large capital gains, but also losses. While it is common for a share price and a call warrant price to move in parallel, the percentage gain (or loss) will be varied because of the formula used to determine the final payout.
To illustrate this, let’s say that share XYZ gains RM1 per share from RM10 to close at RM11. The percentage gain would be 9%.
However, with a RM1 gain in the call warrant, from 50 sen to RM1.50, the percentage gain would be 66%.
As mentioned above, the leverage call warrants offer can be high. But when the gains are big, the losses can be big too!
If the price drops by RM1, the percentage loss for the share price would be 10%, while the loss on the call warrant could drive the value close to zero. The large drop could bring the settlement price lower than the exercise price, resulting in a zero payout.
Yes, call warrants can offer a smart addition to an investor’s portfolio, but due to their risky nature, call investors need to be attentive to market movements and informed before making their investment decisions.
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