Main features of covered warrants
Geared exposure to the underlying at a fraction of its cost.
Covered warrants are geared products, enabling 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 is 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.
Unlimited upside and downside risk limited to your initial investment
Covered warrants provide investors with 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.
Portfolio Hedging
Covered warrants are also ideal for long-term investors who want to
protect and grow their assets when markets are falling. Put covered
warrants, which rise in value if the underlying asset price falls below
the strike price, offer an opportunity to hedge against losses in an
existing investment portfolio.
The simplest and most commonly used strategy is buying a FTSE 100 or
FTSE 250 put covered warrant. These will go up in value as the equity
market falls, offsetting your losses on your shares.
How to trade in covered warrants
First of all, you will need to open an account. You can trade within our and our . Unfortunately, you cannot trade covered warrants within your Investment ISA.
Our covered warrants in detail
Important Information
Before trading you should fully understand the nature of covered warrants and the extent of their exposure to risk, indicating your understanding. Covered warrants will be held until expiry unless you sell them during their life. The maximum loss is limited to the initial investment. Under LSE rules, covered warrants may not be shorted (selling a covered warrant without having purchased it). If this is the first time you have traded in covered warrants you will be asked to complete an appropriateness assessment.
