Warrant trading bounty

MONEYWEB, Julius Cobbett, 30 May 2005

Will a R100 000 competition breathe life into the dusty warrants industry?

Moneyweb community members may have noticed that four of the five big issuers of warrants, namely, Investec, Absa, Standard Bank and Nedbank, together with media house Finance 24, have launched a warrant trading competition in which the lucky winner walks away with R100 000.

Entry to the competition is “free”; all one needs to do is open a warrant trading account and buy a minimum of four warrants (those issued by Deutsche Securities, the pioneer in the South African warrants market, do not count). The challenge started on Monday; the person who experiences the largest percentage growth on his or her trades by August 26 will win the bounty. Entries close on July 22 2005.

Simon Brown, managing editor of SA Warrants and one of the promoters of the competition, says that it appears this year’s competition is on track to match last year’s success. Last year’s competition attracted roughly 850 entrants, eight of which realised returns of over 100% in a three month period; the winner managed a return of 151%.

Of course, the profit made from trading warrants is subject to economies of scale. Smaller investors’ returns are prone to erosion by costs. Brown recommends that traders need a portfolio with a bare minimum of R20 000 to protect against costs.

But warrants are not as popular today as they once were. Today, the South African trader is spoiled with a wide array of products that will satisfy his or her desire for leverage. This is a far cry from the situation three years ago, when warrants ruled the derivatives roost. The modern day menu includes single-stock futures, contracts for difference, spread trading, share instalments and a variety of similar products. Many traders shun warrants because they are deemed to be more difficult to understand than conventional securities.

Brett Duncan, head of the warrants trading desk at Standard Bank says that there is still good demand for warrants despite the fact that a number of competing products have entered the market. Duncan says that trade in warrants currently averages around R13 to R15-m a day, compared to the daily R25-m to R30-m recorded three years ago.

Arthur Buchner of Nedcor Securities says that demand for traditional warrants (those warrants which are effectively an option to buy or sell underlying securities) has definitely been overtaken by demand for futures. According to Buchner, the futures market is 3-4 times larger than warrants in terms of volume.

Buchner says that warrants industry has, to a large extent, been kept afloat by instalment warrants, a breed of warrant with characteristics similar to those exhibited by futures. Instalment warrants offer the purchaser access to movements in the price of an underlying security. The gearing of these products tends to be lower than that of conventional warrants and futures.

The bottom line is: there are a number of products that allow speculators to place leveraged bets on a wide spectrum of securities. These products display different characteristics that appeal to speculators and investors according to their risk profiles and wallets. Those wishing to lay claim to the R100 000 are advised to familiarise themselves with the technical details of warrants, such as gearing, time “decay” and strike prices. A comprehensive guide to warrants can be downloaded from Standard Bank’s warrants website: www.warrants.co.za.

Posted in Market commentary

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