Guide for Beginners

Different effective gearings will result in different amplifying effects...

  • Imagine the following situation: one Tencent share is priced at approximately $300, but 1 Tencent warrant is priced at only $0.1 to $0.2. Investors can use $0.1 to $0.2 to track the performance of a stock valued $300. That relationship is leverage.

  • Put simply, assuming all other factors remain unchanged, it is the movement in the warrant price when the price of the underlying assets is changed by 1%.

    For example, when the Tencent stock price rises by 1%, for a Tencent call warrant with an effective gearing of 10x, the warrant price will, in theory, rise by 10%; for a Tencent put warrant with an effective gearing of 8x, the warrant price will, in theory, drop by 8%.

  • In practice, warrants with high effective gearing are generally short-term and more out-of-the-money products; warrants with a low effective gearing are generally long-term and more at-the-money or in-the-money products.

    Therefore, there is no one-size-fits-all criteria for selecting a high or low effective gearing, so it mainly depends on risk tolerance. Aggressive investors tend to select warrants with high effective gearing, while conservative investors prefer products with low effective gearing.

Consolidate your memory immediately!
A Tencent put warrant has an effective gearing of 10x. Assuming that all other factors remain unchanged,
when the Tencent stock price rises by 1%, the warrant price will, in theory,
Why doesn’t the warrant price rise as much as the rise in the price of the underlying assets? That is due to the implied volatility!
Please refer to
"Terms: Understanding Warrant Terms One by One (V) - Implied Volatility"
Understanding Warrant Terms One by One
(1) Exercise Price (2) Expiry Date (3) Entitlement Ratio (5) Implied Volatility
Correct!
When the price of the underlying assets rises, the put warrant price will drop according to the effective gearing, and the theoretical decline = 1% × 10 = drop by 10%.
Wrong!
When the price of the underlying assets rises, the put warrant price will drop according to the effective gearing, and the theoretical decline = 1% × 10 = drop by 10%.