We have explained in the Guide for Beginners that a stock warrant’s sensitivity is calculated as follows:
This formula includes two variables: minimum spread of the underlying assets and minimum spread of the warrant. Maybe investors will ask, "what is ‘minimum spread’?"
Under the rules of the stock exchange, when listed securities are in different price ranges, the minimum spreads for movements are also different, detailed as follows:
Security price ($) | Minimum spread |
|||
---|---|---|---|---|
From | 0.01 | To | 0.25 | 0.001 |
Above | 0.25 | To | 0.50 | 0.005 |
Above | 0.50 | To | 10 | 0.010 |
Above | 10 | To | 20 | 0.02 |
Above | 20 | To | 100 | 0.05 |
Above | 100 | To | 200 | 0.10 |
Above | 200 | To | 500 | 0.20 |
Above | 500 | To | 1,000 | 0.50 |
Above | 1,000 | To | 2,000 | 1.0 |
Above | 2,000 | To | 5,000 | 2.0 |
Above | 5,000 | To | 9,995 | 5.0 |
For example, when Tencent increases or drops by 1 tick from the price of $350, the price will change to $350.2 or $349.8 rather than $350.1 or $349.9; when HSBC increases or drops by 1 tick from the price of $65, the price will change to $64.95 or $65.05 rather than $64.98 or $65.02. Therefore, where the stock prices of the underlying assets are in different ranges, the movement sensitivity of their warrants will also be different.
Because stock prices are in different ranges, their minimum spreads will also be different. When the price of the underlying assets increases or drops to a different range, the sensitivity of the relevant warrants will also change.
Taking a 10:1 call warrant of China Life Insurance as an example, say its delta is 0.4, and the spot price is $0.08, When the price of China Life Insurance is less than $20, the minimum spread of the underlying assets will be $0.02, its sensitivity is =
hat is, when the price of China Life Insurance moves by 1 tick ($0.02), assuming that all other factors remain unchanged, it is not enough to move the warrant price even by 1 tick; only when the price of the underlying assets moves by 2 ticks ($0.04) can the warrant price move by 1 tick ($0.001); and only when the price of the underlying assets moves by 3 ticks ($0.06) can the warrant price move by 2 ticks ($0.002).
However, when the price of China Life Insurance rises above $20, the minimum spread of the underlying assets will be changed to $0.05, its sensitivity is =
That is, when the price of China Life Insurance moves by 1 tick ($0.05), assuming all other factors remain unchanged, the warrant price will now move by 2 ticks ($0.002). The warrant’s sensitivity has clearly increased with the increase of the minimum spread of the underlying assets.
In addition to the stock price, when warrant prices are in different ranges, their minimum spreads will be different, and the sensitivities of the relevant warrants will also be different.
Say the spot price of AIA is $85. The delta of a 10:1 AIA call warrant is 0.4, and the spot price is $0.240. The minimum spreads of the underlying assets and the warrant are $0.05 and $0.001 respectively, so its sensitivity is =
That is, when the AIA share price moves by 1 tick ($0.05), assuming all other factors remain unchanged, the warrant price will move by 2 ticks ($0.002).
However, when the warrant price rises to $0.26, the minimum spread of the warrant will become $0.005, so its sensitivity is =
That is, when the stock price of AIA moves by 3 ticks ($0.15), assuming all other factors remain unchanged, the warrant price will only move by 1 tick ($0.005). The warrant’s sensitivity has clearly dropped with the increase in the minimum spread of the warrant price. It also explains why products priced below $0.25 are generally more popular with investors.