By now you have probably read numerous articles on Afterpay Touch (ASX: APT), the wonder stock of the ASX. It’s no surprise to see it gain so much attention; it has grown at breakneck speeds you’d typically only see in a penny stock. Some analysts believe this is a self-feeding monstrosity, that like Monty Python’s Mr. Creosote, is likely to burst. Others, which have been proven right so far, believe the loss-making company will continue to rally as it pushes into new markets, with the moon as the next key target.
Regardless of which camp you currently sit, most agree eventually APT will have run too hard not to have decent correction, of which could be equally as aggressive.
How to “Short”
When you feel the time is right, there are several ways you can “short” the stock. “Shorting” can be a laymen’s term for a trade where you profit from a fall in the share price and lose if it appreciates.
There are several ways to short APT, with some methods better than others. One of the better ways is to use derivatives, specifically ones that are traded through the ASX such as Options and Mini Warrants.
Options are the most flexible instrument tradable on the ASX, but with flexibility comes complexity and traders should have a decent background or education in Options before trading them.
Mini Warrants on the other hand are much simpler, but still provide the ability to profit from a depreciating asset price and if you have a trading account for the ASX, it is highly likely you can trade them.
Mini Warrants
Mini warrants derive their value from an underlying asset, in this context, APT’s share price. Therefore, as APT’s share price appreciates/depreciates, so does the value of an APT Mini Warrant. If you buy a Mini Long on APT, the value of the Mini will increase as APT’s share price rallies. If you buy a Mini Short (the focus of this article) the value of the Mini will increase as APT’s share price falls.
Mini warrants are leveraged, which essentially means you use less capital to make more gains. It also means that losses can be harsher, so you need to manage your risk effectively. Mini Warrant risk is capped, so like purchasing a share of APT, the most you can lose is the money you put in. They also have an inbuilt stop loss, which when triggered, will automatically close the trade.
Finally, as previously stated, Mini Warrants are traded on the ASX which offers some protection to traders in the form of regulation and transparency. Some other derivatives like Binary Options and CFDs are often not regulated and sit on a company’s balance sheet. There are plenty of reasons why traders should avoid these with plenty of articles out there explaining why.
Example of trading a Mini Short on APT:
APT’s share price is $70.
The purchased Mini Short is APTKOU, which costs $32.80 per Mini.
APTKOU has an inbuilt stop of $85.39. If this is breached, the trade will close automatically.
Below is a payoff matrix of per cent profit. The Y axis is share price movement in three per cent price increments from the current share price. The X axis is time in 7 day increments.
The payoff matrix shows that if APT falls by 15 per cent, the value of your trade increases by 32 per cent. This is the effect of leverage, where in this case, you make double the profits compared to simply shorting the stock.
There are other Mini Shorts you can trade on APT depending on how leveraged you want to be.
Mini Warrants are a simple way to short stock that most retail traders have access to without needing special permission from their broker. They afford a trader a relatively cheap way to short where risk is capped, stop losses provide protection, and most importantly, are traded through the ASX. They simply sit in your portfolio and are traded like normal equity.
TradersCircle offers regular online education courses on both Mini Warrants and Options, find out more about their programs by clicking here.
Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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