TOP40 index warrants

[#1]

Gents & Ladies, I hope you can help me please. I am a long term investor and have never traded derivatives. I am exploring to protect a portfolio against downside using index warrants. Please review below example and tell me whether my understanding is accurate: TOP40 index circa 46228 SBTOPR - index warrant put option - strike 41000 - expiry 04Nov'14 - conversion 5000 - price 10c Assume I buy 100,000 warrants at 10c = R10,000 My understanding is 100,000 warrants would convert to 20 index futures (assume in the money) One index future at 41,000 strike gives exposure to R410,000 (my understanding is 1 index point equals R10?) So if the market falls below 41,000 I would have downside protection equivalent to 20 index futures X 41,000 strike X R10 per point = R8,200,000? Your help is much appreciated

[Bouwer]

Well not exactly, that is where your delta comes in to play. Your delta determines the move in the warrant. Example if the market is at 45000 and goes to 43000 that is a move of roughly 5%. If you have a delta of 40% the move in the warrant will be 0.4 of the 5%, i.e. only a 2% move in the warrant.

[#3]

Thanks Bouwer. My question relates specifically to when I'm in the money, then the delta should be 1 right? I'm more concerned with whether I'm interpreting the exposure provided by the underlying (i.e. the index future) correctly. If I am short 1 index future at 41,000 and the market falls a further 1,000 points to 40,000, does that mean that I will experience a positive movement of 1,000 points times R10 per point = R10,000?

[Bouwer]

Your delta will accelerate higher the further you are in the money. It doen't move to one as soon as you are in the money, the gamma however does move to one when you are in the money. Gamma measures the rate of change in the delta. The gearing you are referring to is for the ALSI which also tracks the TOP40. The warrant itself tracks the TOP40 and not the ALSI. IE no gearing like you mention

[#5]

Thanks Bouwer, I appreciate your patience. However, it is a very complicated answer, maybe I should phrase the question simpler. Question 1: The SBTOPR index put refers to the TOP40 index future: Yes or No? Question 2: For simplicicty, forget about the warrant: If I were short 1 TOP40 index future at 41,000 and the index future value drops by 1,000 points to 40,000, does that mean that I have made R10,000 (excluding any costs): Yes or No?

[Staal]

Your sums are correct wrt ALSI futures. Warrants are more complicated - all sort of in-the-money variations depending on the specific warrant. And out-of-the money also. Bottom line, with warrants, you cannot lose more than you paid. Futures (and CFDs) there is no limit! If you happy with your position (direction wise) some warrants may give you higher gearing than the futures. If that is what you looking for?

[Bouwer]

The TOPSBR does NOT have a underlying instrument. It will only pay out the intrinsic value if it is in the money. Try AMSSBI, you can physically go to the underlying equity. No you will not get R1 a point. look at TOPSBS it is in the money by miles and still delta is only 78%. If you buy TOPSBR now by the time it gets to strike price the delta will be around maybe 20% and if it gets to around 40000 delta will be around 25% for (not actual calculations). I hope this helps