Serving the Quantitative Finance Community

 
User avatar
dd3
Topic Author
Posts: 246
Joined: June 8th, 2010, 9:02 am

Covered Warrants

July 7th, 2010, 6:37 pm

How are these priced? Are the essentially options + large premium?I am looking at two covered warrants, one issued by RBOS and the other by SG, that have the same underlying, same expiry and same terms yetone is priced almost 100% more than the other. What's going on here? Are they for chumps as this article would suggest?http://www.learnmoney.co.uk/options/22- ... ants.htmlI have learned (expensively) that the spreads can be ridiculous.
 
User avatar
daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Covered Warrants

July 7th, 2010, 8:09 pm

they are options. a covered warrant is usually issued by a third party on another stock - say RBOS on BA that sort of thing. largely a retail market. issuers may have some market making responsibility. re the pricing of the warrants you mention there are many reasons why they could be different. you say the terms are the same - is the strike price the same, or the conversion ratio ?
knowledge comes, wisdom lingers
 
User avatar
dd3
Topic Author
Posts: 246
Joined: June 8th, 2010, 9:02 am

Covered Warrants

July 7th, 2010, 9:35 pm

QuoteOriginally posted by: daveangelthey are options. a covered warrant is usually issued by a third party on another stock - say RBOS on BA that sort of thing. largely a retail market. issuers may have some market making responsibility. re the pricing of the warrants you mention there are many reasons why they could be different. you say the terms are the same - is the strike price the same, or the conversion ratio ?I don't think I'm allowed give the ISINs here but here's the infoRatio: 1Expiry Date: 17 June 2011Strike: the sameThe only thing that's different between the two in the 'sensitivity data' is the gearingCheap one:Intrisic Value 355.050 Break Even ( GBP ) strike + 0.05 Moneyness ( GBP ) 355.05 Premium 98.054 Gearing 16,530,151.95 Effective Gearing 16221456.274 Delta 0.981 Theta 0.000 Vega 0.000 Rho 0.000 Expensive one:Intrisic Value 355.050 Break Even ( GBP ) strike + 0.09 Moneyness ( GBP ) 355.05 Premium 98.043 Gearing 4,895,213.63 Effective Gearing 4803796.991 Delta 0.981 Theta 0.000 Vega 0.000 Rho 0.000 As for the market making responsibity... if I bought an entire tranche would they *have* to buy them back from me if I sold?
Last edited by dd3 on July 6th, 2010, 10:00 pm, edited 1 time in total.
 
User avatar
daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Covered Warrants

July 8th, 2010, 6:27 am

these look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.
knowledge comes, wisdom lingers
 
User avatar
dd3
Topic Author
Posts: 246
Joined: June 8th, 2010, 9:02 am

Covered Warrants

July 8th, 2010, 7:39 am

QuoteOriginally posted by: daveangelthese look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.They're well out of the money!Strike is 700p, underlying was about 362p when I posted, expiry is June 17th, 2011. A greasy company
 
User avatar
daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Covered Warrants

July 8th, 2010, 8:55 am

QuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelthese look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.They're well out of the money!Strike is 700p, underlying was about 362p when I posted, expiry is June 17th, 2011. A greasy companyhow can the delta be 0.98 then ?
knowledge comes, wisdom lingers
 
User avatar
dd3
Topic Author
Posts: 246
Joined: June 8th, 2010, 9:02 am

Covered Warrants

July 8th, 2010, 9:27 am

QuoteOriginally posted by: daveangelQuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelthese look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.They're well out of the money!Strike is 700p, underlying was about 362p when I posted, expiry is June 17th, 2011. A greasy companyhow can the delta be 0.98 then ?I don't know. I just copied the info from my broker's website. I'll PM you links to the actual warrants
 
User avatar
daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Covered Warrants

July 8th, 2010, 11:56 am

QuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelQuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelthese look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.They're well out of the money!Strike is 700p, underlying was about 362p when I posted, expiry is June 17th, 2011. A greasy companyhow can the delta be 0.98 then ?I don't know. I just copied the info from my broker's website. I'll PM you links to the actual warrantsthe 0.981 delta is actually 0.981% so really zero deltathey are way OTM options - the premium refers to the conversion premium rather than the option premium. the options seem to be worth a few pennies hence the fact that you could get a big %age difference - say one trades at 2c and the other 3c
knowledge comes, wisdom lingers
 
User avatar
dd3
Topic Author
Posts: 246
Joined: June 8th, 2010, 9:02 am

Covered Warrants

July 8th, 2010, 12:12 pm

QuoteOriginally posted by: daveangelQuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelQuoteOriginally posted by: dd3QuoteOriginally posted by: daveangelthese look like deep in the money calls.... given the high deltabut i am not sure if the premium is truly that high nor if the gearing is what you say it is given the high delta.it would be useful if you could tell me whatthe strike, spot and maturity are.They're well out of the money!Strike is 700p, underlying was about 362p when I posted, expiry is June 17th, 2011. A greasy companyhow can the delta be 0.98 then ?I don't know. I just copied the info from my broker's website. I'll PM you links to the actual warrantsthe 0.981 delta is actually 0.981% so really zero deltathey are way OTM options - the premium refers to the conversion premium rather than the option premium. the options seem to be worth a few pennies hence the fact that you could get a big %age difference - say one trades at 2c and the other 3cCool, thanks for taking a look!So, as/if the warrant becomes less OTM these prices should begin to converge? Is the cheap one underpriced or vice-versa?