Warrant is a derivative instrument. A authorize gives the right to its holder to buy the underlying from the company/ issuer at a predetermined cost on a predetermined appointment. Like alternatives it also has a lots size. Warrants are rostered and transactions on the bourses. Simply speaking it is more like an Out of the Money Call option.

Recently, HDFC came out with its Warrants issue. This is the third of its nature by HDFC. The first one was issued in 2009 and evolved in 2012 and second one was in 2015 and evolved in 2018. The current one has following characteristics 😛 TAGEND

Strike Price: 2165

Issue Price: 180

Tenure: 3 Years

Lot Size: 600

There are multiple sells that can be built around it.

Directional Trade

If one is positively lowered towards the stock, can build position using Warrants. Being a 3-year make it can gives a respectable period for a mid to long term investment. The expenditure would be much lower than the cost of owning the stock. For instance, currently the warrant is mentioning at Inr 300/ -. This is 20% the price of underlying. Thus, one comes exposure of the stock without the specific issues around rollover or stigmatize to sell. The important thing here is to price it well, otherwise inspite of an upmove in the underlying one have been unable to establish returns.

Replacing Stock with Warrants

For existing stock owners, they can replace their existing impounding by authorizes. This liberates investible cash. For example, by selling the underlying at around Inr 1800/ – and buying the warrant at Inr 300/ -, there would be an investible excess of Inr 1500/ -. Assuming 6% returns on it, the returns over next 3 years would be able to cover a large of the cost of acquiring the warrant. However, the issue here is the delta would be less so one would not get the best of the upside in the underlying. Likewise, if the stock intents between the Sell Price and Strike Price one ceases up missing the upside. Pricing it properly is important now as well.

Leverage and Replacing the Stock

For existing shareholders who are extremely bullish on the stock can sell the existing confine and invest all or large-scale one of the purposes of it in the warrant. This dedicates them much bigger exposure, nearly 5x of the current exposure into the stock. But clearly higher exposure symbolizes higher jeopardy as well. If the returns can be high so is likely to be the losses.

Covered Call

One can buy the warrant and against that can write Out of the Money Call options. The benefit here is the significantly higher RoI, this is because the investment is of the warrant, while the premium will be calculated on the underlying price. For instance, a 2000 Call quoting at Inr 6/ -, translates to time 0.3% absolute RoI on underlying but 2% absolute RoI on the warrant.

Clearly, if priced accurately, warrants have the ability to give superior returns as one gets much more time than a regular option.

Happy Trading !!!


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