Warrants Product Types
A warrant is a tradable security issued by an institution for a time period that gives the right (and not the obligation) by paying a price to buy (call warrant) or to sell (put warrant) a specific amount of an asset (underlying asset) at a specified price (strike) over the duration of its life or on its expiry date depending on its style.
From this short definition, some basic concepts are taken and defined as follows:
- Time period: This refers to the warrant’s expiry date, which indicates the date from when the warrant no longer exists. The expiry date may or may not coincide with the warrant’s last trading day in the Stock Exchange Interconnection System.
- Warrant price: This is the premium, that is to say, the effective price on what trades are executed on the Stock Exchange Interconnection System. The premium will be closely tied to the price evolution of the underlying asset related to the warrant.
- Call warrant: this is a purchase warrant, that is to say, it gives the right to buy the underlying asset.
- Put warrant this is a sales warrant, which gives the right to sell the underlying asset.
- Ratio: This is the number of underlying asset units that a warrant gives the right to buy (call) /sell (put).
- Strike: Established by the Issuer, it is the price at which the holder has the right to buy (call) / sell (put) the underlying asset at the time of exercising the warrant. Exercising a warrant is when the warrant holder executes his/her right to buy (call warrant)/ sell (put warrant) the underlying asset that the warrant refers to. Exercising a warrant involves its settlement, either by physical delivery of the underlying asset or cash (in euro).
- Style: A warrant can be American-style or European-style. If the warrant is American, it may be exercised during the warrant’s life. On the other hand, if it is European, it can only be carried out on the warrant’s exercise date.
- Traded on Spanish stock market in real time and continuously from 9 am to 5 pm.
- Offer access to a large variety of assets: equities, commodities, currencies, etc.
- Market maker's commitment to provide liquidity, offering buy and sell positions during each trading session.
- Trading transparency as products are subject to strict oversight rules by the stock exchange governing body, Sociedad de Bolsas.
- Can be used to implement different investment strategies.
Turbos may have early termination in relation to the expiry date established in the issue conditions. The early termination possibility is determined by a barrier level. When the underlying asset price reaches or exceeds the barrier level, the Turbo is terminated early (knocked-out).
In the case of Turbo Call, early termination is produced if the Underlying Asset level is “less than or equal to” the barrier established in the issue conditions.
In the case of Turbo Put, early termination is produced if the Underlying Asset level is “more than or equal to” the barrier established in the issue conditions.
When the aforementioned conditions are met, Turbos terminate early without any value and are delisted.
Taking the aforementioned into account, Turbos are characterized by high leverage that is reflected in the premium level (or Turbo price). Similarly, its price evolution is mainly determined by the underlying asset price evolution and not so much by its volatility or expiry term.
Within this same product category, we also find the so-called ‘Turbo Pro’. These incorporate two thresholds (knock-in barriers) that form an activation price range. Therefore, Turbo Pros will remain inactive in the market until the level of the underlying asset trades within the mentioned range. Once activated, Turbo Pros act as any other Turbo.
Bonus offer the performance of its underlying asset and, as long as the level of the latter does not reach a determined lower barrier during the lifecycle of the product, the issuer guarantees a minimum selling price or ‘bonus’. Therefore, if the level of the underlying asset reaches this lower barrier, then the Bonus loses its ‘bonus’ guarantee but remains active on the market.
Within this same product category, we also find the so-called ‘Bonus Cap’. These incorporate a limit to the potential upside performance of the product that is placed at the same level of the ‘bonus’ guarantee, whether it is still active or not at its expiry date.
This type of product grants the right to receive a fixed amount of money on the expiry date, assuming that the value of the underlying asset is still within the limits or the established barriers.
Inlines have both an upper and lower barrier, between which the underlying asset’s price must stay. If the underlying asset’s price touches either of the barriers, the inline will expire automatically without value.
The Discounts are investment products, with the characteristic of offering a maximum return calculated from the difference between the upper and lower barriers. They can be either bullish, Call Discount, or bearish, Put Discount.
The Call Discounts offer a maximum yield when the level of the underlying asset is equal or higher than the upper barrier on the maturity date, or whenever it has remained above the lower barrier during the entire life of the product. If it breaches the lower level the product will remain active in the market but it will no longer deliver the maximum yield unless the first previously described circumstance occurs. If at maturity the underlying asset is below the lower barrier, the Discount would be worth 0.
The Put Discount has a similar behaviour but in reverse.
Stay-High and Stay-Low warrants are listed products that entitle the holder to a fixed settlement on maturity, provided the underlying asset does not reach the barrier set for the product.
The barrier can be set above or below a price depending on whether it is expected that the price of the underlying asset will remain below or above a barrier during the life of the product.
Certificates entitle their holders to receive from the issuer on the settlement date a determined amount on the certificate nominal value in accordance with the underlying asset performance.
The final return of certificates depends on the investment strategy and performance of the underlying asset.
Multi Warrants are suitable for investors who have a specific expectation regarding the price evolution of an underlying asset in the short term. Investors can use this product to take advantage of price movements in a day, as well as to follow short-term trends with a constant leverage. Multi Warrants offer the possibility of participating in price increases (long strategy) as well as in the decrease in prices (short strategy) of the underlying. However, investors should keep in mind that leverage works in both directions and that a total financial loss can occur.
The expiration of the Multi Warrants is not limited and, therefore, investors must sell them or exercise their rights to determine the economic value. The amount received by the owner of the unlimited Multi Warrant when exercised or sold depends on the Net Present Value on the corresponding valuation day.