time decay is likely to be more expensive then cost of carry (with both you are loaning money from the issuer and that costs). The roll over adds an extra cost of 40 bps, not a killer, but not free. My question is why are you rolling over. You bought the Dec 08 contract because you figured you'd be out by then. The expiry comes, you're not out - so you're wrong. best option when wrong is to exit.
farmer B to add to Simon's words, don't make the mistake of looking only at warrant price. So many people new to warrants only look at warrants in the 10c to 30c range. That's the biggest mistake. I do not even look at a warrant's price untill the very end. The things that matter are gearing, Delta (probability of it striking in the money) and Theta (rate of weekly decay). And this changes from day to day. There are several other 'Greeks' (variables) but the three I mentioned are all important. It's their relationship as a whole that makes for a good or bad warrant. I'm sure Simon can advise as the the 'safe' ranges of these variables. For example: I personally will not buy a warrant with a gearing below 3 or above 6 because below three and your reward is too low for the risk while above six the risk outweighs the reward. For Delta you want to be above 50% but often between 30% and 50% you get bargains IF you're quite sure of your direction. For Theta you want it as low as possible as that's the weekly cost of holding the warrant i.e at 10% it's going to cost you 10% per week to hold the warrant. Finally don't ever buy a warrant that has 90 days or less to strike.
to remove the greeks but still have the effect. Look for a warrant with; gearing around 5x for stocks and 10x for indices (in this market dropping both is not a bad idea) strike within 10% of spot time to expiry more then 90 days never buy below 20c, higher is better as spread as % is lower.
gee u guys are amazing hey!! jus answered al but one question, lets say i buy a warrant @ say 13c and it drops below 10c and i havent stopped out, what happens then cos theres all this hype abt not having warrants under 10c
Farmer Brown....take my advice and give warrants a miss....they are gimmicks devised by the banks to make money...u shoudld certainly never ever trade an index warrant....the warrant makers dont wanna know you when things get hairy....they conveniently go to lunch....
below 10c the issuer is still buying, but not selling. But botto line - stay away from 13c warrants. Here's why. The spread is 12/13, so you buy as 13c. Now the warrant moves 8% and the spread is 13/14 and you're at break even . Or worse it drops a cent to 11/12 and you're already down almost 15%, and that 1c drop may have happened on a small move by the underlying if you bought in the wrong place relative to the shoulder.