Warrants trading roars ahead

THE Australian warrants market continues to attract interest from investors and traders, with highly leveraged instalment warrants ‘coming of age’ last year.

Moghseen Jadwat, an associate director of SG Australia, described 2001 as a “boom year” for the Australian warrants market.

The value of premium traded (i.e. turnover) was around $3.3 billion compared with $1.9 billion in the previous year, and a record 1,900 warrants were issued, more than twice the total for the previous year.

Interest from retail investors was stronger than ever, Moghseen said.

Tim Keegan, head of investor services at online broker TD Waterhouse, said trading of both warrants and options had risen strongly.

He attributed much of the growth to the tech wreck of April 2000. Many traders who had focused on tech stocks had since turned to warrants and options.

Call warrants remain the most popular category of warrants, although turnover of put warrants and highly leveraged instalment warrants, commonly known as HOTs, grew faster.

Call warrants are similar to call options – they give the buyer the right to purchase the underlying securities at an agreed price.

They are ideal for traders who want to speculate on a particular stock (or an index) rising in value. Conversely, put warrants give buyers the right to sell an underlying security at an agreed price.

Turnover in put warrants nearly doubled last year, reflecting the bear market conditions, where investors were pessimistic on valuations.

The events of September 11 and a string of profit downgrades added to the demand for put warrants, which give investors a ‘hedge’ or insurance against falling prices.

For instance, an investor worried about the possibility of falling share prices traditionally would have little choice but to sell their shares. Now they can buy put warrants, so they have a locked-in selling price if the market does fall. If their fears are unrealised and the market stabilises or strengthens, they simply retain their shares.

Demand for traditional instalment warrants grew only slightly last year. Instalment warrants are like buying shares on hire purchase – you pay part of the price (say, 50 per cent) up-front and the balance at an agreed date (typically in three to 12 months).

The attraction is that holders receive all dividends and the associated franking credits, so holders of instalment warrants achieve a higher yield than holders of the underlying shares.

The key feature of HOTs is that the initial payment is as little as 20 per cent of the total purchase price.

They are an effective way of gaining leverage without having to borrow money, and are therefore highly popular with self-managed super funds (which are not allowed to borrow).

They also offer potential tax benefits – franking credits can be used to reduce the investor’s tax liability, while the prepaid interest component of the warrant premium may be a deductible expense.

In contrast to options, which are issued by the ASX, warrants are issued by banking groups. There are about 12 major issuers, including Macquarie Bank, BNP Paribas, SG Australia, Credit Suisse and ANZ Bank.

All of the issuers, as well as many stockbroking firms, offer advice on warrants and execute trades for retail clients.

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