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Warrant leverage effect

Warrant is the right to buy an underlying stock or asset, its value is determined by the price and the difference between the underlying share price .

Suppose that the reader has a "certificate" to exercise the right, which allows you to buy a designated property for 1 million yuan, then how much is this certificate worth? If the current price of this house property is exactly 1 million yuan, the value of the right is zero, because this right will not bring any "benefit" to the holder. Assuming that the market price of the property has risen to 1.2 million yuan, at this point the holder can still buy 1 million yuan, and then sell at the market value, so you make 200 thousand yuan, that is to say, this warrant brought 200 thousand yuan of benefits. Right now, warrant holder has two options:  exercise it by theirselves and then to cash out at market price, or sell this warrant to others. The latter situation formed warrants market. In the market, sellers will give this "benefit" to others,  asking 200, 000 yuan, or he would  choose the former way, to cash out.

The situation in the stock market is the same. When the price of the underlying stock is 5 yuan and the exercise priceis 4.8 yuan, then the value of the warrant ( the price for exercising this right) is 0.2 yuan. If the underlying stock rises to 5.3 yuan, then the value of the warrant rises to 0.5 yuan. In this case, the rise of the underlying stock is 6%, and the rise of the warrant is 150%. The amplification effect reaches 25 times. In view of the author's experience , warrants amplifying effect is usually 4 - 12 times. But there are also tens or even hundreds of times magnification.

In actual operation, few people hold warrants that expire. Often, when the underlying stock fluctuates sharply, they use the amplified leverage effect of the warrant to complete a fluctuate and leave. In times of extreme volatility, sometimes a fluctuate can bring 1-4 times profits to investors. This characteristic of warrent, attracted many investors to participate in.

In Hong Kong, warrants are one of the most popular investment products. Since the first derivative warrant was listed for trading in Hong Kong in 1988, the types of warrants have become increasingly diverse. In addition to Blue chips, the underlying assets include indexes (Hang Seng Index and State-owned Enterprise Index) , major state-owned enterprise stocks and individual Chinese enterprise stocks, foreign indexes, currencies and oil, and the warrant product market shines brightly. According to statistics from the Global Federation of Stock Exchanges, Hong Kong's warrant market surpassed Germany, Switzerland, and Italy in 2005 to become the world's largest warrant market.

At present, institutions, retail investors, and exchange participants themselves (including corporate and market makers) each account for one third of the total trading volume in the warrant market. This fully shows that warrant investment is a variety suitable for all ages. It can not only be used as an effective tool for institutions to carry out hedging operations and asset allocation, but also as a good method for individuals to obtain higher returns to verify their own judgment.

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors.  It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.