Investment warrants

Tend to be longer dated and less freqently traded, with a lower risk/return profile than trading warrants.

Can be used by investors looking for long-term leveraged exposure to the underlying instrument. 

May also offer other features such as entitlement to dividends, or a capital guarantee on the initial investment.

Types of investment warrants include Instalments, Endowments, Self Funding Instalments and Structured Investment Products.

Trading warrants

Trading instruments that provide leverage to an underlying instrument.

Can be used to help manage risk on an investment portfolio.

Can be used to trade the direction of an underlying instrument over the short term, usually with a high risk/return trade off.

Types of trading warrants include Calls, Puts, Equity, Index, Currency, Commodity, Knock-out and MINIs.

Leverage

Most warrants offer some form of leverage.  This means that a small percentage change in the underlying instrument means a larger percentage change in the warrant.

Low purchase cost

Lower initial outlay than investing in a share or underlying instrument directly.  Purchasing a warrant gives you the same economic ownership exposure for less cost.

SMSF benefits

Instalment warrants are an eligible form of SMSF gearing which can provide both income and deduction benefits.

Enhanced investment income

Instalment warrant holders are entitled to the full dividends and franking credits of the underlying shares.  Percentage yield is increased due to the lower initial cost.

Unlocking wealth

Holders of an existing portfolio can convert shares to instalment warrants through a process called ‘cash extraction’ which unlocks wealth to invest elsewhere.

Portfolio protection

Some types of equity and index warrants allow you to protect the value of a portfolio by locking in a sale price.

Loss management

Some types of call and put warrants can expire worthless, however, your loss is limited to the invested capital whereas losses could be a lot higher if you held the underlying instrument.

Exposure

Index warrants offer exposure to the broader market without the need to own a large portfolio.

Pricing variables

A warrants pricing is subject to many variables such as price of the underlying instrument, time to expiry, volatility, interest rates and dividends.  Any adverse changes can have a negative effect on the warrant.

Leverage

Leverage is a double edged sword, with a warrant likely to move both up and down more rapidly than the underlying instrument.

Limited life

Warrants have an expiry date and therefore a limited life.  Unless the underlying share price is above the exercise price for call warrants or below the exercise price for put warrants upon expiry, the warrant will expire worthless.

Time decay

Warrants are decaying assets so it is important to monitor expiry dates and know when to exercise a warrant.