5 steps to covered warrant trading

1. Assess the risks

Prior to any investment in covered warrants, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information with which you are provided, by consulting, if you deem it necessary, your own advisors in these matters or any other professional advisors.

In particular,  you must remember that your entire invested capital is at risk. As a consequence, you should not deal in this product unless you understand its nature and the extent of its exposure to risks.

2. Define a scenario with a specific timeframe

 Once the risks are understood, you will have to select an underlying and an investment view (bullish or bearish) over a certain time period.

For instance, you anticipate a 150 point growth in the FTSE 100 over the next 6 months or you might identify trading opportunities in major stock, commodity and currency markets around the world.

Characteristics such as timeframe, target level and stop-loss have to be defined. Simply thinking that the FTSE 100 will rise is not a detailed enough scenario as it does not give an indication of the timeframe or levels needed (target level and stop-loss) for your investment to be realised. 

3. Select your covered warrant, click here

 Here are some ground rules to keep in mind at this stage:

  • If you have a bullish scenario, i.e. anticipate a rise in the underlying, select a call covered warrant. If it is a bearish view, select a put covered warrant.
  •  Whatever your scenario, multiply your timeframe by at least 2 or 3 times to select the maturity of your product, this will help reduce the effect of time decay over the anticipated time of the investment.
  • Select a reachable strike price. There is no point in choosing a covered warrant with a strike price that you know the market will never be likely to reach.
  • Check the delta. Ideally it should be between 30% to 60% for calls and between -30% to -60% for puts. (Delta can be defined as the sensitivity of a covered warrant’s theoretical value to a change in the price of the underlying security). Remember, the lower the delta, the riskier and the cheaper the product.
  • Some might also be interested in considering the gearing. Be careful not to choose a covered warrant too highly geared, as gearing works both ways and should be seen more as a risk indicator than as a decision making criteria.

For instance, for a bullish, 200 points, 1 month, scenario on the FTSE 100, a call covered warrant with a maturity in 3 months, a strike price of 200 points above the current index level and a delta of, say, 45% would fit the parameters required.

Product characteristics, including product code, strike price, delta and effective gearing are available for each product on the SG website. You can select an appropriate covered warrant from the list of underlyings available on www.sglistedproducts.co.uk, depending on your view and risk profile.

 4. Simulate the outcome

By using the covered warrants simulator available on www.sglistedproducts.co.uk/tools, you can forecast your scenario on the selected underlying and simulate what will potentially happen to the covered warrant’s value.

This helps you to estimate the impact on the price of the covered warrant of a movement in the underlying price, volatility and time. You can also use this tool to simulate different outcomes and gain a good understanding of the potential risks and returns.

The outcomes of the simulator are for information purposes only and not a guarantee of performance. Under no circumstance should it, in whole or in part, be considered as an offer to enter into a transaction.

5. Trade and monitor your position

Make the trade with your usual UK stockbroker. Covered warrants can be traded like shares and can be held in your standard trading account. Société Générale has no facility to trade directly with private investors.

version : 4.38.0-SNAPSHOT