How to Value Thai Call and Put Warrants

Warrants are a special type of security listed on the Stock Exchange of Thailand (SET) that enable you to create a long or short position on an underlying Thai share. Before you commence trading a Thai warrant it is important that you first assess its true value. You then have a reference point upon which you can base your opinion of what is a reasonable price to pay for it. With that in mind, let’s have a look at some essential features of Thai warrants and the key factors that influence their value.

Essential Features

There are two types of Thai warrant. A call warrant that gives the holder the right to buy a company share at a specific price within a certain time frame, and a put warrant that gives the holder the right to sell a company share at a specific price within a certain time frame. The right to buy or sell is not mandatory, so the value of a call or put warrant can never fall below zero. That is, the holder of a warrant is never subject to a margin call.

The price of a call warrant goes up if the price of the underlying share goes up. An investor who buys a call warrant hopes or expects the underlying share price will rise. He or she is said to have opened a long position.

The price of a put warrant goes up if the price of the underlying share goes down. An investor who buys a put warrant hopes or expects the share price will fall. He or she is said to have opened a short position.

A Thai warrant is referred to as a leveraged instrument. This is because the price of a warrant is less than that of the underlying share. In other words, warrants provide an investor with a way to control a larger amount of shares using less capital than if he or she purchased those shares directly. As the price of an underlying share goes up or down the percentage gain or loss on its warrants is magnified.

Warrants may be issued by the underlying company itself, or by a third party such as a broker. Because there are no standard guidelines, the details of each warrant issue will vary. However, expiry date and exercise price are two essential features included in the details of every Thai warrant:

Expiry Date: The term expiry date can have a different meaning depending on the exercise style of the warrant. There are two common styles: American, were the warrant can be executed on or before the expiry date, and European, where the warrant can only be executed on its date of expiration. Both of these styles are used in Thailand.

Exercise Price: This is the amount that a call warrant holder must pay to obtain the underlying share or the amount per share that a put warrant holder is assured to receive.

Factors that Influence the Value of a Warrant

There are three key factors that influence the value of a warrant:

Intrinsic Value: This is the most important reference point upon which to calculate how much you should pay for a warrant. Intrinsic value is always greater than or equal to zero and represents the difference between the warrant exercise price and the current market price of the underlying share.

For example, if an investor holds a call warrant with an exercise price of 4 Baht and the underlying share is currently trading at 7 Baht, that person has a warrant with an intrinsic value of 3 Baht. If the price of the underlying share drops to 3 baht, then the intrinsic value of the warrant becomes zero.

Time Value: It is normal for a warrant to sell for a price that is higher than its intrinsic value. This is because its market price also includes an amount that reflects how much time is remaining before the warrant expires. That is, there is perceived value in the time remaining for the warrant’s underlying share price to move in the desired direction. Time value diminishes as the expiry date of a warrant moves closer.

Interest Rates: Prevailing interest rates can also influence the value of a warrant. Because less capital is required to control the underlying shares, warrants become more valuable when interest rates go up.

Assessing the true value of a Thai warrant is seldom an easy task because it requires that you make a number of assumptions about future events. However, if you remain mindful of the key factors that influence value, the task is made a good deal easier, and you are much better placed to determine whether the current market price of a warrant is reasonable.

Your comments or feedback on this article are welcomed. If you want to ask a warrant related question you can post it as a new topic in the forums.

If you want to learn more about Thai call warrants please read: 360% Profit in 4 Months Trading a Warrant.

If you want to learn more about Thai put warrants and how to use them to create a short position please read: How To Short Thai Shares.

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