A warrant, also referred to as a “subion warrant” in the traditional stock market, refers to a right rather than a liability (the investor may choose not to exercise such right under unfavorable circumstances), and is used to purchase (call warrant) or sell (put warrant) the underlying stocks. The principle is very simple, which is that investors buy a call warrant when they believe the future market is bullish and put a warrant when the market appears bearish. When an investor holds a warrant, he/she can buy or sell the target asset at an agreed upon price on a scheduled expiry date. Warrants are ideal for investors with some investment experience, and those who prefer medium to high risk.
What is Warrant Trading?
Warrants, like CBBCs, are essentially an option. Investors purchase call warrants or put warrants from the issuer, and can freely trade these warrants before the expiration date, depending on market conditions, to gain returns from an increase/decrease in the price of the target asset.
The price of a call warrant/put warrant is generally determined by the issuer. In addition to considering the target asset price, pricing will also take other factors into account such as: strike price, time value, implied volatility and so on. Since warrants and CBBCs are also leveraged, buyers only need to invest a portion of the value of the target asset to track the asset’s increases and decreases, instead of the full value of the target asset.
A Warrant is Usually Structured Like This:
Let’s take Gate.io’s warrant product “BTC-21FEB-44000C-C” as an example:
“BTC”: means that the target asset is the BTC_USDT spot index; “FEB”: means that the expiry month of the warrant is February; The first “C”: means that the attribute of the warrant is a call warrant; “C”: means that the same issuer has issued multiple BTC warrants that expire in the same month but with different terms. “C” is to show the difference.
How to Trade Warrant?
Gate.io is now offering warrant simulation trading, so users can practice risk-free.
Step 1: Click on the “Trade”---click on the“ Warrant” button
Step 3:The selection of trading targets is based on a combination of factors, such as: bullish or bearish, leverage ratio, to call price, premium, etc.
Bullish: trading call warrants Bearish: trading put warrants
Prefer high risk/high return: choose a high leverage ratio Prefer low risk/low return: choose a low leverage ratio
Each warrant has one strike price, which refers to the ution price at which investors hold a certain warrant until it expires, and investors buy or sell the target asset with a theoretical upward potential. Take a call warrant as an example. When the strike price is higher than the current price of target asset, it is called “Out-the-Money”; when the strike price is lower than the current price of the target asset, it is called “In-the-Money”; when the strike price is equal to the current price of the target asset, it is called “On-the-Money”. Put warrants are on the contrary.
Strike price is an important factor that drives investor choice. Generally speaking, the more “Out-the-Money”, the higher the risk, but the greater the return.
Each warrant has an expiry date, and holders can freely trade warrants according to market conditions, before the expiry date. In theory, the longer the expiry period of the warrant, the higher the value, because the longer term means that the target asset has more time to rise/fall to the strike price.
Warrant value = time value + intrinsic value
It refers to the value of the warrant before the expiry date. The longer term of the warrant, the greater time value contained. Time value of the warrant is lost every day. The closer the expiration date, it means that the remaining time value will be less . All warrants (regardless of calls/puts) have zero time value when they expire
Intrinsic value only exists on “In-the-Money ” warrants. This refers to the value brought about by the price difference between the target asset price and the strike price. The “Out--the-Money” warrants will not include intrinsic value.
This refers to the market’s prediction towards the future volatility of the target asset price. The higher the volatility expectation, the higher the “implied volatility” will be. This can benefit both call and put warrants. If the market has a low volatility expectation, the implied volatility is likely to fall, and call as well as put warrants will be negatively affected.
This refers to how many warrants can be purchased in exchange for one unit of the target asset. The entitlement ratio reflects the sensitivity of the warrant to changes in the target asset price. The higher the entitlement ratio in the same price area, the lower the sensitivity to changes in the target asset price; the lower the exchange ratio, the higher the sensitivity to changes in the target asset price. When the market is volatile, warrants with lower sensitivity and higher exchange ratio can be considered; when the market is less volatile, CBBCs with higher sensitivity and lower exchange ratio can be considered.
Comparison Between Warrant and CBBC
Risks of Warrant Trading
When an investor holds a warrant, if the underlying asset market trend is opposite, it will not be forcibly recovered, but the value of the warrant may return to zero, and investors can wait for the market to reverse and choose to sell. After the warrant expires, the will calculate the settlement amount of the warrant based on the settlement price, exercise price, and conversion ratio for automatic settlement (Gate.io warrants use "cash settlement" and currently use USDT as the settlement currency).