Trading Warrants

Fact is even many so called professionals (e.g Financial Advisers) often know nothing about warrants and think they are far riskier than they really are. This collective ignorance is to the benefit of the few who do understand them. There are often amazing bargains simply because they are traded by so few and unlike with shares you can sometimes even catch the market makers asleep.

e.g when a share price soars and the warrant doesn’t move until a couple of buyers wake them up. Ditto when the share price falls heavily and the warrant price doesn’t. Again it takes a couple of lucky sellers escaping to wake them up. You don’t get that happening with a share – e.g after a profits warning. The price will have moved before you can deal.

To give you a specific example. I don’t go along with the bull case for gold, but wanted a bit of a stake in case I’m wrong, so I went for a modest buy of Petropavlovsk warrants at 40p (formerly Peter Hambro Mining). I was not interested in risking money on the shares, then around £9.   The share has risen from £9 to a recent peak around £13 – a rise of a bit over 40%. The warrants went from 40p (and those quicker than me got them at 20p a few days earlier) to £3 to sell at one point to give a return of £7,500 and a profit of £7000 for those who bought at 20p and sold at the top.

Slow coaches like me staking £500 in the warrant at 40p – turned that in to £3,750 and a profit of £3,250 within a few weeks. Now you would have needed to stake nearly £9000 on the shares to get the same profit at 40p for the warrant and you would have needed to stake nearer £18,000 on the shares to get the same profit on a 20p warrant buy.   This lack of understanding of warrants by so many otherwise clued up investors costs them a lot of profits and a lot of fun too.

And your maximum possible loss on the shares if they go bust or the Company is a fraud would be £9000 or £18,000 compared with just £500 on the warrant!

Are warrants simply stock options with a different name?

No. Warrants and call options are very similar in as much that they both give the right of the holder to acquire shares at a fixed price at some time in the future. But, the difference is that warrants are issued by the company/fund/(investment trust) involved and the money raised, if the warrants are exercised, goes to the company/fund. New shares are issued by the company/fund/(investment trust) upon exercise. Call options are normally written by a third party. If the option is “called” then the party writing the option has to get hold of the shares. No new shares are (normally) issued.

Who is the best online warrant dealer to open an account with?

Warrants are traded just like ordinary shares and are normally quoted on the relevant market. So you can normally deal with any stockbroker. (I believe with some stockbrokers you have to sign a form stating that you know what you are doing with respect to warrants). You cannot put warrants into an ISA but there is a new type/variant of warrant called “a subscription share” which is ISA-able.

To what extent can one speculate on UK equity price movement – is this solely restricted to FTSE 100 stocks?

Warrants are issued by company/fund involved. Only a minority of companies/(investment trusts), on the LSE, have warrants currently issued.

What has been your personal experience in terms of profitability/loss with warrants?


Before anyone goes rushing in to all sorts of warrants, remember there are downsides too – not the ones lack of liquidity and wide spreads at times to mention two. And they can be difficult to buy and sell in any size and difficult to sell on down days.  That varies from warrant to warrant/subscription share to subscription share, and often depends on how many are in issue.   So they are mostly only suitable for small stakes. But because they are traded so little, mispricing is common – yet another plus for those on the ball.

The main advantage of spread bets over warrants is that spread betting is treated as gambling and so is capital gains tax free. Also IG Index give you credit on your account to start with so you don’t even have to use cash to prime your IG account.

  1. No comments yet.
  1. No trackbacks yet.