There is an old adage “Sell in May and go away” which has served investors well in the past couple of years, with the ASX 200 slumping -18% in 2010 and last year plummeting -25% from its April peak.
So we thought it timely to discuss how you can trade Short in the market – that is, profit from falling share prices while at the same time limiting your risk.
In earlier articles we’ve discussed how you can use options to trade the market short, and today we’re talking about MINI Warrants.
MINI Warrants
MINI warrants are a “new” trading instrument gaining in popularity, allowing you to trade the market short or long, with a predetermined risk. The MINI trading warrants have been designed to compete with the CFD market, and have a number of features that make them a far superior product, as outlined below.
The MINIs market was established in 2007 by RBS and last year Macquarie Bank and Citigroup joined in, to expand the MINI warrant offerings.
The MINI warrant market gives you exposure to ASX200 stocks, Indices (ASX200 SPI, Dow Jones, S&P500, NASDAQ, HANG SENG, etc) Commodities (Gold, Silver, Copper and Oil) and Currencies (EURUSD, GBPUSD, AUDUSD, AUDEUR, AUDGBP, etc).
MINIs have a six letter code, eg. BHPKMD. The first three characters identify the stock, the fourth identifies the warrant type (K=MINI), the fifth refers to the issuer and the last character signifies the series (or leverage).
One of the major risks with trading CFDs is that you stand to lose more than 100% of your initial outlay, if the market gaps against you. We discussed these perils in the article Mind the Gap: Trading Risk with Options Versus CFDs.
MINI warrants are a type of warrant listed on the ASX:
• They are a CFD-style trading instrument that provides investors with a 1 for 1 participation with the underlying asset (ie. a 1 cent rise of fall in the stock price equates to a similar 1 cent move in the MINI).
• Investors can choose their level of leverage based on their own risk profile, as there are a number of MINIs (or leverage levels) available for each stock.
• Before trading MINIs, traders need to read and understand the ASX Understanding Warrants Booklet and then sign the Warrant Agreement form. Speak to your broker or contact us at D2MX on 1300 610 024.
Key features of MINIs:
• MINIs are traded and regulated on the ASX Securities Exchange.
• You can trade long and short directional moves simply.
• There are no margin calls.
• There is no optionality since there is no expiry date, though there are financing charges.
• Transparency through 1 for 1 participation between the move in the underlying asset and the MINI.
• No expiry dates – open ended investments.
• MINIs present an efficient way to short sell and can be used for hedging existing share positions.
• No credit checks or approvals required.
In summary, MINIs are a geared product that are listed on the ASX, have known risks, are simple, flexible and transparent, and there is no risk of a margin call. You should note that simplicity, a regulated market on the ASX and the predefined trade risks are the major advantages over the CFDs.
MINI Warrant Terminology
The MINI warrant is made up of 3 parameters:
• The MINI Value (the prices at which it trades)
• The Strike Price (indicates the loan amount)
• The Stop Loss price (the price at which the MINI ceases to trade and the position is closed out)
MINIs Valuation
Value of MINI Long = (Reference Asset Price – Strike Price)/Conversion_Factor#
eg. For a $50 stock, with a MINI Strike Price of $40 the MINI Long Value = ($50-$40) = $10, ie. leverage is 80%.
Value of MINI Short = (Strike Price – Ref Asset Price)/Conversion_Factor#
# Note the Conversion_Factor for Stocks is 1.
The Strike Price
• Reflects the amount of leverage (loan amount)
• Is adjusted daily for financing cost
• Dividends and index futures roll are reflected in the strike and the stop loss level.
The Stop Loss Price
Is the price at which the MINI ceases to trade and the position is closed out. The PDS document details how this is done.
Case Study
Sam owns 1000 CBA shares that he has held since CBA first floated. In mid-February, after CBA had gone Ex-Div $1.37, Sam believed that CBA shares would see some further weakness in the following weeks and decided to hedge his position when CBA bounced back to $49.50. Note that when you trade MINIs short you are actually rebated interest on your position (in this example we have used a 1% p.a. rebate).
After a couple of weeks CBA did in fact trade lower and Sam closed his position at $47.50 after 15 days, for a profit.
The profit on the MINI Short position offset the losses on the 1000 CBA shares, so the portfolio position at the end of the 15 days is as follows:
So Sam got to hold onto his CBA shares, avoiding a capital gains tax event, and got to keep his dividend as well.
The Trade
If you are of the opinion that this is a “Sell in May and go away” trading environment, then the MINI warrants are an excellent way to participate. As shown in the case study MINIs are a great way to hedge current portfolio positions too. MINIs can be used to trade stocks Long as well, as we will discuss in later articles.
For help trading this new product contact me on 1300 610 024. Each MINI warrant has a PDS document which details all the features of the specific warrant.
Note that before trading MINIs, traders need to read and understand the ASX Understanding Warrants Booklet and then sign the Warrant Agreement form, or contact us at D2MX now on 1300 610 024.
Warrant Trading for All Types of Market Environments Series
Part 1 – Shorting With Limited Risk Using MINIs
Part 2 – Boosting Dividend Yield Using Warrants
Michael Hevern
Investment Adviser
D2MX Retial Trading
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of MDS Financial Services Pty Limited ABN 28 088 190 283 AFSL No. 333298 (MDS), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by MDS Financial Services Pty Ltd, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
