Longer-dated Singapore bank warrants – suitable for the lower-risk warrant investor
🆕Macquarie has newly listed warrants tracking the three Singapore shares with a one year expiry for investors interested in a leveraged exposure to the three local banks
⏳Warrants with a longer time to expiry tend to experience slower time value erosion – or a lower rate of time decay – than warrants with a shorter time to expiry
✳✴Warrant investors who wish to take a longer view over the three Singapore banks may consider these longer dated warrants to reduce their holding cost of warrants
Read on to find out more about the advantages of longer-term warrants:
Slower time value erosion with longer-dated warrants
One of the reasons investors buy and trade warrants is due to the high gearing they provide while costing only a fraction of the underlying index/share price.However, the cost of leverage comes with a price – time decay. Time decay may be viewed as the holding cost of warrants, where the time value of the warrant erodes with time, and accelerates towards the warrant expiry. A rule of thumb is that a warrant loses 1/3 of its time value in the first 2/3 of its life.
Thus, investors are encouraged to buy or trade warrants with an expiry longer than their holding period/view. With longer-dated warrants, warrant investors who wish to take a longer view over the underlying indices and shares will see slower time erosion on the warrants compared to the shorter-dated ones.
Investors can use the Warrant Calculator tool for an estimation of the time erosion/holding costs with warrants over the holding period they are looking at.
An example is the shorter-dated UOB call warrant YUZW (https://warrants.com.sg/tools/warrantcalculator/YUZW) expiring on 26 Feb 2027. This warrant erodes approximately two ticks ($0.002 or 3.7%) over a 6-day holding period from 3 to 9 September, assuming all else (such as UOB’s spot price, implied volatility levels) constant.
Warrant calculator to estimate time decay of YUZW:
Warrant calculator to estimate time decay of YUZW
We compare this with this morning’s newly listed UOB call warrant KFUW (https://warrants.com.sg/tools/warrantcalculator/KFUW) expiring a year from now on 30 September.
The warrant erodes approximately one tick, or 1% over the same 6-day holding period, assuming all else constant.
Warrant calculator to estimate time decay of KFUW:
Warrant calculator to estimate time decay of KFUW
Lower risk with longer-dated warrants
While the time erosion is sharper in the shorter-dated call warrant YUZW, it offers a higher gearing level of 7.8 times (as of the time of writing), meaning it will move approximately 7.8% for a 1% move in UOB shares.
The longer-dated call warrant KFUW on the other hand, has a lower effective gearing figure of 4.9 times (as of the time of writing).
Effective gearing, which indicates the percentage change in the price of a warrant relative to a 1% change in the underlying, is also an indication of the amount of risk in the warrant. Generally, the higher the effective gearing level, the higher the amount of risk in that warrant. In this case, comparing just their effective gearing levels, the longer-dated UOB call is a lower-risk warrant than the shorter-dated warrant.
This morning’s newly listed bank warrants with one-year expiries:
$OCBC Bk MB eCW270930(SOIW.SI)$
$OCBC Bk MB ePW270930(JBXW.SI)$
UOB MB ePW270930 (VB4W)
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
