Beside stocks, there are many alternative financial instruments. Today I’ll talk about inline warrants (its speculative usage)*.
Inline warrants are derivatives – they (and their value, therefore) are based on other assets, such as stocks, commodities, foreign exchanges, precious metals, etc… The thing to note is that inline warrants value is strongly influenced by its underlying asset.
So… now we know inline warrants have an underlying asset, what else? Inline warrants have a upper limit and a lower limit – if the underlying asset ever reaches one of those limits, before the inline warrant maturity date, the inline warrant automatically loses its value (i.e. it can no longer be traded and its value is 0 (zero)). As you may have already guessed it’s a high risk, high return instrument.
I implicitly referred another property of warrants, they have a maturity date. If the inline warrant reaches the maturity date, its owner receives €1 for each warrant he has. Remember that if the underlying asset ever “touches” any of its limits, the warrant expires immediately.
It’s quite simple to understand that this type of warrants is more adequate to low volatility underlying assets. On the other hand, you can follow one of those tactics:
- Buy in a high volatility period (when they’re cheap) and sell in a less volatile period (when they’re expensive).
- Buy now if you don’t expect the asset to experience significant volatility until the inline warrant maturity date.
Inline warrants value increases with time. Their value decreases when its underlying asset value is getting closer to any of the limits.
Underlying asset – EUR/USD (the exchange rate between the Euro and the United Stated dollar). Upper limit: 1.35; Lower limit: 1.28. Maturity date: 24-01-2007
If the EUR/USD exchange rate ever reached the upper (1.35) or lower limits (1.28) say bye bye to your money. On the other hand, if it made it trough the 24th of January of 2007 without touching any of the limits, you would get €1.
The closer the EUR/USD is to 1.315 (the average between 1.35 and 1.28) the bigger its value.
Over the last days the EUR/USD has been quite unstable and close to 1.28, so is its value decreased significantly.
Inline warrants are quite interesting instruments that can lead to great returns. They are very risky, though, and should only represent a small fraction of your investments portfolio. Use them in stability periods. Avoid them during high volatility.
*This post reflect my knowledge of the European Inline Warrants market. I believe, although, that the US Inline Warrants Market works the same way.
Última actualização: 02/02/2017Partilhe: