Why buy options and not covered warrants?

[genbie]

Hi,

I don't trade either yet, but I have been trying to compare buying options vs covered warrants. The latter seem to score on ease of trading, tighter spreads, guarantee of liquidity but they still seem to be shunned by the majority of people who trade options. Is it because they are too expensive, or as some claim a complete rip-off? Also, is it true that a warrant trader is, in a way, at the "mercy" of the issuers, and how?

It seems to me that once you get an options account set up, and aim not to day trade, then warrants lose two of their main advantages (ease of trading and tighter spreads), or am I wrong?

Also, aren't warrants securitized derivatives supervised by the London Stock Exchange, so how can the issuers rip-off or easily put any trader at a disadvantage as some charge without the LSE doing something about it?

Thanks in advance.

 

[Airthrey Capital]

Covered warrants are expensive.

You can replicate the same strategy using other instruments ( such as options) at a far cheper price.

 

[bulldozer]

People like options more because there are far more strats than Warrts, also you cant write them like you can with options.

bull

 

[Robertral]

Well C.W are priced and produced from a single company, ehnce they know yo can only buy to open and they will bid up those fookers......when u sell they will call them down a fook load.....stay away from CW as you pay comm and you will a massive skewed spread.......plus as said before you can't short to open so you r only limited to log calls,,puts. stangles, straddles....call/put strips......go with options all the time

 

[genbie]

Thanks all for the replies.

Aithrey, I agree that CWs, in general, are more expensive. Obviously putting more capital at risk than options.

Bulldozer, what do you mean by saying options having more strats please?

Robertal, but doesn't the LSE supervise the trading of CWs and any "unfair" practices by individual issuers? Also, if an issuer drops the price right after one buys a CW, wouldn't that be counterproductive to the issuer because it will make the CW cheaper for other traders? Obviously, they can't just keep dropping the price! Is there something I am missing?

Many thanks again.

 

[bulldozer]

Bulldozer, what do you mean by saying options having more strats please?
==============================================================

You cant do the folowing:
butterfly, condors,short strangles, short straddles, short puts or Calls, infact any strats with written legs, etc. Also as the others are saying, they are too expensive.

bull

 

[genbie]

Bulldozer, what do you mean by saying options having more strats please?
==============================================================

You cant do the folowing:
butterfly, condors,short strangles, short straddles, short puts or Calls, infact any strats with written legs, etc. Also as the others are saying, they are too expensive.

bull

Many thanks bulldozer. Silly me, I didn't think that strats stood for strategies! But my interest is in mainly comparing the buying of both instruments because you simply can not write CWs.

One point in favour of CWs however is the fact that there is no minimum contract size which may be an advantage for the small trader. Also, I think as more issuers enter the UK market, prices will be become more competitive hopefully!

 

[genbie]

As a side point, anyone has any experience with covered warrants in any of the more established European exchanges (e.g. Germany) please?

Thanks in advance.

 

[zzaxx99]

Advantages of Covered Warrants:

• Can be traded from your 'normal' internet execution-only broker (providing you use Comdirect or TD Watercloset There may (or may not) be others now)
• smaller entry cost - you don't need a £10,000 account to set up an option trading account
• Allegedly, tighter spreads
• Allegedly, better liquidity
• Competition between different MMs for same underlying gives variety of different 'models'

Disadvantages of Covered Warrants

• No writing, so available strategies are more limited (in the early days, I'm not so sure this is a disadvantage, but for experienced, option-savvy traders it certainly is)
• p!ss-taking manipulation of the price by the market makers
• Single MM on each warrant means you're locked into that pricing - competition between warrants is only an issue before you've bought
• By one of those strange statistical flukes, when there's large movement in the underlying, the warrant is unable to be traded online until the underlying stabilises

Despite all of these, it's possible to make good money with CWs, but you have to have your eyes open and your wits about you - there really is some sharp practise in the pricing of some of them (some of it gets reversed for people when they formally complain - some they get away with).

 

[genbie]

Advantages of Covered Warrants:

• Can be traded from your 'normal' internet execution-only broker (providing you use Comdirect or TD Watercloset There may (or may not) be others now)
• smaller entry cost - you don't need a £10,000 account to set up an option trading account
• Allegedly, tighter spreads
• Allegedly, better liquidity
• Competition between different MMs for same underlying gives variety of different 'models'

Disadvantages of Covered Warrants

• No writing, so available strategies are more limited (in the early days, I'm not so sure this is a disadvantage, but for experienced, option-savvy traders it certainly is)
• p!ss-taking manipulation of the price by the market makers
• Single MM on each warrant means you're locked into that pricing - competition between warrants is only an issue before you've bought
• By one of those strange statistical flukes, when there's large movement in the underlying, the warrant is unable to be traded online until the underlying stabilises

Despite all of these, it's possible to make good money with CWs, but you have to have your eyes open and your wits about you - there really is some sharp practise in the pricing of some of them (some of it gets reversed for people when they formally complain - some they get away with).

Hi zzaxx99,

Many thanks for the useful info. Much appreciated. As I see it, the major disadvantage of CWs is the possibility of MMs manipulating the pricing. But I can't see how this might be useful to them because at any point in time there is only one pricing model for each warrant that is equally applicable to all traders. So if the pricing changes, and the price drops, after one buys a warrant, it is bound to be good for someone else out there, but I may be missing something! Also, I think it is too much risk for the reputation of these big issuing banks if someone submits a valid complaint to the FSA or the LSE.

Also, the fact that CWs did not pick up yet in the UK makes me wonder. That's why I asked if there was anyone familiar with the CW markets in Europe as I am puzzled how it can get so big in Germany for example if they are not as good as they are claimed to be.

Thanks again.

 

[Profitaker]

As I see it, the major disadvantage of CWs is the possibility of MMs manipulating the pricing.

There aren't any market makers - just the institution providing a two-way quote.

But I can't see how this might be useful to them because at any point in time there is only one pricing model for each warrant that is equally applicable to all traders.

True, the manipulation (for want of a better word) of prices is done to suit their book, not to catch out any individual. But that's no consolation if you're on the wrong side of it !

So if the pricing changes, and the price drops, after one buys a warrant, it is bound to be good for someone else out there,

Yep, but I'd rather trade in a real market, where there is competition for my business, and the price I see is a true reflection of supply and demand.

Also, I think it is too much risk for the reputation of these big issuing banks if someone submits a valid complaint to the FSA or the LSE.

What exactly would you complain about ?

Also, the fact that CWs did not pick up yet in the UK makes me wonder.

It could be that folks find their leverage in other instruments (CFD's, spreadbets, etc, etc), but I don't know.

 

[genbie]

Hi Profitaker,

Many thanks for the reply.

There aren't any market makers - just the institution providing a two-way quote.
True, the manipulation (for want of a better word) of prices is done to suit their book, not to catch out any individual. But that's no consolation if you're on the wrong side of it !
Yep, but I'd rather trade in a real market, where there is competition for my business, and the price I see is a true reflection of supply and demand.

In other words, CW issuers are in the same camp of spread betting companies who also create a 'market'. The issuers' response is that it is not a zero-sum game between them and a trader as was detailed in a recent Investor Chronicle supplement on CWs. Their claim is that the only source of profit is "from the bid-offer spread and proper and efficient hedging" (page 12 of IC Masterclass January 2005).

What exactly would you complain about ?

About why has the price suddenly and inexplicably changed for example

 

[zzaxx99]

Another great advert for Covered Warrants - completely unable to trade online on Tuesday SG, JPM and maybe others online systems were (allegedly completely down) - when I called my broker by phone, I was quoted a price 30+% higher than the current real price!

 

[Airthrey Capital]

Further to previous post on this thread regarding how expensive covered warrants are....

Take a live example today

SG warrant (s604) FTSE June 5000 calls 126 bid - 128 offered (IV 12.3)

City Index spread bet FTSE June 5000 calls 93 bid - 98 offered (iv 9.4)

Warrants are a complete rip-off by comparison. You may think City's spreads are wide....but at least there is some reality in the quoted price.

All we need to do now is arb between the two and sell the warrant big-time, and purchase the options through City!

Shame cant short warrants.

How can they get away with it?

 

[Airthrey Capital]

And before anyone asks they are BOTH European style with exactly the same expiry dates.

 

[Robertral]

Further to previous post on this thread regarding how expensive covered warrants are....

Take a live example today

SG warrant (s604) FTSE June 5000 calls 126 bid - 128 offered (IV 12.3)

City Index spread bet FTSE June 5000 calls 93 bid - 98 offered (iv 9.4)

Warrants are a complete rip-off by comparison. You may think City's spreads are wide....but at least there is some reality in the quoted price.

All we need to do now is arb between the two and sell the warrant big-time, and purchase the options through City!

Shame cant short warrants.

How can they get away with it?

The same way a service station gets away with such high prices......

 

[Airthrey Capital]

For a laugh, try calling SG Warrants on the following number.......

0800 328 1199 (its free)

And ask them to explain the price difference.......

Very amusing. I tried it and spoke to a guy with an American accent,

Talked complete BS, assuming he could blag his way with some retail punter!

Try it yourself...very amusing!

 

[bulldozer]

AC,
Why would any one buy them at that price? Unless ofcourse there is a masive discount on LARGE purchase. But they seem to be selling them alright and stay in business. :cheesy:
The other thing that gets me is: Why is it they wont let anyone write them? I guess the simple answer is>> they want the cake all to themselves. :cheesy:

 

[Profitaker]

Airthrey

All we need to do now is arb between the two and sell the warrant big-time, and purchase the options

Don't you think that's exactly what the warrant institutions do all the time ?

 

[Airthrey Capital]

Profit taker,

Of course, the institutions who actually issue the warrants (such as SG ) do.

But the opportunity is not open to us lesser mortals.