First, readers will note that CashBench has an on-going three-part series on SGX structured warrants that discusses the key features of warrants and every important aspect that an investor must know before investing in warrants. The first-part of this series can be found here.
The Sunday Times article was indeed a good introduction to options, however, it did not compare options to warrants, which is appropriate as both share many similar characteristics. CashBench will now point out the three key differences between options and warrants to complement our current series on warrants:
1. Options can be “written”
Recall that warrants come in two types, Call warrants and Put warrants. Investors typically buy a Call warrant if they expect the underlying asset price to rise. Alternatively, we can buy a Put warrant if we expect the underlying asset price to fall.
These two basic types are also available in options. We can therefore buy a Call option or a Put option as well. However, option investors can also “write” an option for a fixed price. For comparison, writing an option is similar to acting like a warrant issuer that issues a new Call or Put warrant. As you can imagine, this increases the risk of options investing. For an explanation, see the second major difference between options and warrants below.
2. Options can result in unlimited loss
In the event that the option can be exercised … our poor investor must cough up the money to pay the profits of the option buyer
A warrant buyer’s maximum loss is always limited to the amount he initially paid for the warrants, be it Call warrants or Put warrants. This is also the case for those who buy options.
However, investors who choose to write options can face an unlimited loss. This is because the only gain from writing an option is the fixed price the investor receives. Once “written”, this option is sold to anybody who wants to buy a call or put option. In the event that the option can be exercised (just like warrants), our poor investor must cough up the money to pay the profits of the option buyer. For this reason, all option writers are subject to the risk of an unlimited loss.
3. Differences in underlying asset
Warrant issuers can choose from a wide range of underlying assets that include major stocks listed on the Singapore Exchange, as well as major stock indices from other countries.
Options on the Singapore Exchange are currently available for the Nikkei 225 Index, MSCI Taiwan Index, MSCI Singapore Index, Eurodollar and Japanese Government Bonds. As you can see, there is not a lot of overlap between the underlying assets of options and warrants. In the Singapore context, warrants generally have a larger selection of underlying assets to choose from. Option investors will also need to open a trading account specific to options/futures before they can start investing in options.
Readers should now have a good idea of the differences between options and warrants. Do look out for the last part of CashBench’s three-part series on warrants too. The first two parts can be found here and here. If you would like to receive a PDF report of this entire series before they are published on CashBench, join the CashBench group on Yahoo! to get the report immediately. Group members will also receive email updates on the latest analysis, forecasts and news from CashBench. Membership is free too, just provide your email address below.
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Your comments?
Hi Michael,
Glad to find this blog. Just a quick question, why are stock warrants so popular in Singapore as compared to say stock options.
Hi there :)
To answer your question, there are several key reasons:
First, would be the strong promotion & education on warrants by SGX, together with the support given by warrant issuing banks. Without issuing new warrants all the time, there will be no warrants for investors to buy or sell from.
Second, the underlying asset of warrants are either large locally listed companies, or based on popular stock indices like the STI and Hang Seng. This familiarity certainly helps investors to try out warrants.
Third, options on stocks are typically issued on foreign-listed stocks, and will require a specific account to be opened to invest in them. Those who are really keen to invest in options will typically do so via US stock exchanges where there are many more options to choose from. That means additional steps. In contrast, warrants in Singapore can be bought/sold using a normal stock broking account.
Fourth, warrants are cheaper to buy than the underlying stocks. This encourages investors to try out warrants, otherwise they may only be limited to investing in penny stocks.
I hope I have answered your questions. To receive updates on news, analysis and forecasts published on CashBench, do sign up for e-mail updates or follow us on Facebook/Twitter.
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