Market volatility in times of fiscal crisis results in many investors ducking for cover while haplessly taking their money out of the markets as quickly as possible. However, this is entirely not the case for everybody. What may seem like a rough road ahead for some can be relatively exciting for others. Those who like to dive deep into volatility have been looking at a much wider range of derivative products as a method of taking full advantage of fluctuations.
Covered warrants for example, can be particularly fitted to volatile markets and as such appear to be increasingly enticing to private traders. These instruments are essentially options that are packaged in a retail-friendly specifications wherein investors can easily access their trades through their stockbrokers making them a lot easier to use for anyone with options trading.
Basically, covered warrants allow buyers an inert right and not a liability to buy or sell the assets that the warrants are based at a given fixed price. So if you speculate that the FTSE 100 will rise from its current price, then you would purchase a call warrant on the index where as you would buy a put warrant in the index as you would do for a put warrant if you suspect that the index will experience another drop.
The manner in which this works is basically a lot simpler than most of you would think. For instance, if you purchase a covered warrant anywhere between 10 and 50p then as brokers cost would eventually cover the purchases then traders will most likely buy £200 of covered warrants with the option of either buying or selling the asset at an agreed level at a specified date.
Strike Price
Covered warrants come with a lot of expiry prices and they come in very handy for hedging positions. People who have stock portfolios experienced hefty losses as stocks crumbled down last year and have bought put warrants on the FTSE 100 to curb their losses. If you believe that the index will rise over the next few months, then you could purchase a put warrant on the FSTE 100 as a form of a hedge.
Consolidating profits
Since covered warrants are considered by the London Stock Exchange as exchange-traded, their price is transparent and is an accurate representation of the supply and the demand in the market. It simply means that you can sell your covered warrant at any point before it expires either consolidating your gains or losses just before they expire. Usually, investors don’t hold on to their warrants until it expires, hence preferring to lock in what they have already made.
While the FTSE 100 is presently the most popular trader covered warrant, traders have been attracted to several other assets as well. Copper and aluminum for instance are considered rather popular as covered warrants.
Perhaps one of the main benefits of covered warrants is that, it mirrors spread betting and contract for differences in terms of letting traders make a greater percentage profit than the percentage move in its underlying asset price.
This means that traders can greatly benefit substantially from sharp movement in prices over long period of time which of course can be emphasized in a volatile market. Despite the fact that volatility has significantly dropped off last year’s high, it still allows you to capitalize on its aftermath.
If you intend to get involved in the present market, this is surely one advantageous way to do so despite the gloomy economy.