Covered warrants FAQs
If you have any further questions on covered warrants please visit our 'Ask a question section'
- What are covered warrants?
- How to choose a covered warrant?
- What does all the information in a covered warrants name mean?
- What is the difference between covered warrants and company warrants?
- What are my risks?
- What is gearing?
- What does the expiry of covered warrants signify?
- When can I trade covered warrants?
- How can I place an online covered warrants trade?
- What are the charges and settlement dates?
- Where can I find further information?
What are covered warrants?
Covered warrants are financial products, listed on the LSE.
They provide, to private investors, leverage exposure on their bullish
or bearish views for an underlying asset such as UK and non-UK equities,
global indices, commodities and currencies.
Covered warrants offer unlimited upside potential but, unlike certain other leveraged offers, your maximum loss is limited to your initial investment, no matter how badly the markets move against your view. They also provide all the benefits of a LSE listing: transparency, liquidity and their regulatory framework.
Covered warrants are issued by financial institutions, which maintain the buying and selling prices on the exchange, but they are traded through UK stockbrokers. They can be held in a or and are ideal to either gear up your market views or hedge your portfolio.
How to choose a covered warrant?
A
gives the holder the possibility to benefit
from an increase in the value of the underlying asset (bullish market
view), while limiting potential losses to the premium paid.
The purchase of a is suitable for a strategy based on an expected decrease in the value of the underlying asset (bearish market view). The Put can be used for portfolio hedging or speculative investment for an underlying asset going down.
What does all the information in
a covered warrants name mean?
The naming convention for covered warrants says a lot about
the covered warrant itself. For example, the VOD_130p_Call_20-Mar-2009
(SD70) informs the investor that he will have the right to buy (call)
the underlying, Vodafone (VOD), at 130p at expiry on 20 March 2009.
What is the difference between covered warrants and company warrants?
A covered warrant is issued by financial institutions, such
as Société Générale. They are issued to ‘’cover’’ any of a wide range
of underlying securities, and can be bought and sold much like shares.
By contrast, a ‘warrant’ is a security issued by a company, giving a right to purchase one of its own shares, which involves physical delivery of the new shares. Both choice and liquidity are limited in these instruments.
What are my Risks?
Unlike certain other leveraged products, you cannot lose more
than your initial investment. There are no contingent liabilities and
you will never be asked to pay extra for a stop-loss feature.
Before trading you should fully understand the nature of covered warrants and the extent of their exposure to risk, indicating your understanding. If this is the first time you have traded in covered warrants, you will be asked to complete an appropriateness assessment.
What is gearing?
This enables investors to obtain exposure to the performance
of an underlying asset for a fraction of its price.
Small price movements in the underlying asset result in large moves in the covered warrants price because covered warrants cost a fraction of the underlying asset itself. That’s the gearing effect.
Gearing indicates how much the covered warrants price will theoretically move in response to a change in the underlying asset price (with all the other parameters remaining at the same level).
For example, if an underlying share price is 100p, a covered warrant issued on that share may be trading at 20p. So an investor buying the warrant at 20p is gaining exposure to price movements in an asset worth 100p – gearing of five times.
What does the expiry of covered warrants
signify?
Covered warrants usually have 3, 6, 9, 12 or 18 month maturities.
The expiry date represents the limit of the covered warrants life.
At expiry date, all covered warrants are expired (they are ‘’automatically
exercised’’) and cash settled. However, they can be (and usually are)
purchased and sold back into the market during their life, at the current
market value provided through a continuous bid-offer spread.
When can I trade covered warrants?
Covered warrants can be traded during the London Stock Exchange
market hours.
How can I place an online covered warrants trade?
Covered warrant Trades can be placed between 08.15 and 16.30.
You can buy and sell covered warrants within a or a . Due to Inland Revenue regulations you are not permitted to buy or hold covered warrants within an ISA.
You can check the share price for covered warrants, before placing a trade, in exactly the same way as for a normal equity. Before you login you can access 'Quick Quotes' which are 15 minute delayed share prices or you can login and use the Real Time Quotes. Both options can be found on the top of the left hand menu bar on all pages. Alternatively you can use the search option on the ‘Enter Order’ page with the real time price displayed in green to the right of the screen.
What are the charges and settlement
dates?
Charges
Commission is charged at the same rate as standard equities, with covered warrant trades counting towards your deal count. At the time of trading
commission will be charged at the standard equity rate. Due to the fact
that all UK listed covered warrants are cash settled, with no stock
transferred, you will not be charged the 0.5% Stamp Duty usually incurred
on UK share purchases.
Settlement
Trades in covered warrants settle 3 working days from the date of trade.
If you choose to exercise the covered warrants or it is exercised automatically
on maturity, we will settle this with the market within 5 working days
from the date of maturity. The proceeds will be paid to your account
within 10 working days of the funds reaching us.
Where can I find further information?
Alternatively, you can go to the London Stock Exchange website: www.londonstockexchange.com or the websites of any of the covered warrant providers themselves, www.sglistedproducts.com or www.rbs.co.uk/markets.
