To The Moon

🆕Macquarie has listed a new pair of call and put warrants tracking the Hang Seng Index and UOB shares to open new opportunities for investors interested in a leveraged exposure to increasingly volatile markets

🐌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 underlying may consider 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 HSI call warrant $HSI 27400MBeCW260528(KLZW.SI)$ ) expiring in May 2026. This warrant erodes approximately one tick ($0.002) daily, assuming that the underlying index does not change. We compare this with this morning’s newly listed and longer-dated HSI warrant $HSI 23800MBeCW261029(HSEW.SI)$ which erodes approximately one tick, or 1.1% over a 5-day holding period.

Lower risk with longer-dated warrants

While the time erosion is sharper in the shorter-dated call warrant KLZW, it offers a higher gearing level of 15.4 times, meaning it will move approximately 15.4% for a 1% move in HSI futures.

The longer-dated call warrant HSEW on the other hand, has a lower effective gearing figure of 4.7 times.

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. In this case, the longer-dated HSI call is a lower-risk warrant than the shorter-dated warrant.

Use effective gearing to estimate warrant investment amount

Effective gearing can also be used to help investors decide the amount of dollar investment in warrants.

Take for example HSI 23800MBeCW261029 (HSEW) with its effective gearing of 4.7x. This means, an investor who believes that HSI will go up in the near-term and are keen to have an exposure of $20,000 to it may wish to consider buying ($20,000 / 4.7x = $4,255) worth of call warrant HSEW to gain a similar effective exposure to the HSI.

This is how the Exposure Simulator tool calculates the warrant investment amount for investors after one types in the intended stock or index exposure under “Number of shares owned” to generate the “Underlying portfolio value” i.e. intended exposure.

You can view every warrant’s risk/effective gearing figure either in the warrant terms page or under the effective gearing column in warrant search table at www.warrants.com.sg.

Today’s newly listed warrants:

HSEW

$HSI 28200MBePW261029(PUHW.SI)$

$UOB MB eCW260930(Y2FW.SI)$

$HSI 28200MBePW261029(PUHW.SI)$