First off, a Mini Warrant is a derivative. Which is a financial product that derives its value from something else. So, derivatives on a stock like CBA go up and down in value depending on what CBA’s share price does. There are many different types of derivatives that have different levels of leverage and functionality.
Some of these derivatives are traded directly on the ASX (Mini Warrants / Exchange Traded Options (ETO’s) and others are traded on third party markets (CFD’s). It is generally considered that trading ASX products come with much lower insolvency risk, as Minis are traded on HIN.
We trade mainly Mini warrants and Exchange-traded options. Minis are great in a trending market, and whilst Options provide a lot of flexibility, they are a lot more complicated to learn.
If you are trading short to medium term in the market from 1 day to perhaps even 6 months, I challenge you to look at Mini Warrants.
Mini warrants are issued by Citifirst and are a listed instrument on the ASX and Chi-x markets. The benefits of Mini warrants as a trading tool are that they offer the user leverage and the ability to go short. Going short allows the user to profit from the stock falling.
There are two types of Minis – Mini Long that profits from upward share price movement and Mini Short which profits from downward movement.
Minis have a 6-digit code that can be used in your platform to transact on.
You can see that there is a range of different strikes and different spot levels to choose from. This will also adjust your gearing (Leverage) levels to suit your risk tolerance.
Let us have a look at the most leveraged of the minis on CBA, the CBAKOC which has an 83.60% gearing. This means that Citigroup are funding 83.60% of the stock ($71.76). You are only funding the remaining $14.30.
There is an automatic built-in stop at 80.25 if that level is breached you will be stopped out. It is not a guaranteed stop which means you will only get back what they can sell the hedge for minus the strike. In my experience, you tend to get back almost the amount between the stop and the strike for shares trades. In this case 80.25 – 71.76= $8.49.
Minis move one-to-one with the share price, so if you entered at $14.30 and CBA went up $1.00, then your trade would be worth $15.30. If it went down 1 it would be worth $13.30.
Above is a demonstration of time over the share price. There is a funding element that you must consider. The funding ranges depending on the stock instrument is around 5% pa on the geared amount. Then if you are trading currency, commodities, or indices this amount can vary.
To demonstrate the leverage, you can see that for every 2% share price movement up, you make 12.04%. But if you get the direction wrong you need to be careful as it would be a 12.04% loss if the share price moves down 2%.
Leverage is great when you know how to use it, but it can be dangerous if you are new to the market and do not manage things properly. Every trade I do I follows strict money management. I always have my own technical stop.
If you took a risk of $4,290 (300 of the CBAKOC @ 14.30) you would make $516 from a 2% move in the share price. The other way to look at this is for you to get this type of exposure you would have to buy $26,000 worth of CBA. So, trading this way you can trade with far less of your capital.
The major downfall is that you do not get any dividends or voting rights that come with buying the stock. But if you are only trading short to medium term, I would imagine that would not matter too much anyway.
All in all, we believe it is a great product if you are a trader and see the value in going short and the value in using leverage. But with this product, you also need to be good at picking direction of the market.
We have a few products that can help you on your journey in either learning how to trade or help with executing strategies using Mini Warrants. To learn more, go to https://www.traderscircle.com.au/trading/ or call an advisor on (03) 8080 5788.
Tim Michaelides is the Head Trader at Emerald Financial Group.
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