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Beat the bear with SG Covered Warrants
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Covered Warrants
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Investors are increasingly interested in gaining exposure to indices to complement a stock holding. Indices provide broad market exposure and can prove less volatile than single stocks. With SG Index warrants, UK investors can take a leveraged bull or bear position on an entire market or hedge their existing holding as easily as trading a share.
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Advantages of SG Index Warrants
Diversity
SG Index warrants exist on 9 main indices. Investors can access well known indices from all around the world via instruments traded like a share on the London Stock Exchange.
Potential for high returns with limited risk
SG Index warrants can offer far higher returns than a direct investment in the indices. This is because they are geared financial instruments: the investor can gain exposure to the index with less capital invested than an equivalent direct investment in the index itself.
Most importantly, investors benefit from unlimited upside potential while the downside risk is limited to the initial amount invested.
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| Other advantages... |
-SG Index Warrants do not have to be held to expiry
-SG Index Warrants can be bought and sold at London Stock Exchange price with tight spreads
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Hedging your portfolio with SG Index warrants
You own a £10,000 portfolio of UK blue-chips and you fear a drop in the UK Market. You can hedge your portfolio, for instance, by investing in an SG Put Warrant on the FTSE100 index.
Your portfolio is equivalent to approximately 2 FTSE100 indices:
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Porfolio value (£) / Index value (pts) = 10,000 / 5,761.75 = 2
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In this example, you choose to purchase the SG Put Warrant SL57.
The number of warrants required to hedge our portfolio against a drop in the UK market:
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Number of warrants = 2 x Parity = 2,000 warrants at 83.9p
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Consequently, you will invest £1,678 (2,000 x 83.9p) in the SG index warrant.
Assume now that in June, at maturity of the warrants, you were right and the UK market dropped by 20%. The new value of the
FTSE100 is 4,609.40 and we assume the value of your portfolio also fell by 20% and is now worth £8,000.
Your investment in SG put warrants is worth:
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(Strike level of warrant–Value of the index)/Parity x number of warrants = (6,500-4,609.40)/1,000 x 2,000 = £3,781.20
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You needed to compensate for a loss of £2,000 in the value of your portfolio, by hedging it with SG Put warrants, you are fully compensated for your loss as your final payoff is £2103.20 (i.e. payout – initial investment = £3,781.20 – £1,678).
More importantly, in the case you were wrong and the UK market increased by 20%, the value of the FTSE100 would be 6,914.1 and the value of your portfolio would be £12,000. You would only lose the initial amount invested (i.e. £1,678). Of course, if you change your view during the life of the warrant, you are able to exit your position by selling back your warrant holding on market.
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Use Index Warrants to profit from a fall in the market
Covered Index Put Warrants allow you to speculate a fall in the index.
Bearish example using FTSE 100 Put Warrants
The price of the SL56 put warrant is 59.7p, it has an effective gearing of 5.8x. If the FTSE100 falls by 1% to 5,691.26, the warrant put price would increase by 5.8% to 63.16p in the short term, all other factors remaining constant.
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Change in the index warrant’s price = Effective gearing of warrant x % change in the index
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In the worst case scenario, the maximum loss is your initial investment (59.70p).
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