Trading warrants

A warrant is an option that gives you the opportunity to participate in the market and take on a large exposure by investing a relatively small capital sum. This creates the opportunity for big gains, but also involves big risks. Before you decide to buy any warrant, you should carefully consider the information provided in the issuer's base prospectus as well as the final terms for the particular warrant in question.

Oslo Børs offer issuers the possibility to list Plain Vanilla Warrants and Mini Futures within this product group. Warrants are issued by a financial institution, and are traded in the secondary market in the same way as shares. The valuation of a warrant is specified in its prospectus and is guaranteed by the issuer. An investor should read and understand each instrument’s specifications before trading in it.

The underlying for warrants must consist of the following:

  • shares or other financial instruments
  • an index, a basket of shares or other financial instruments
  • currency or a basket of different currencies
  • commodity or a basket of different commodities

Plain Vanilla Warrants

Plain Vanilla Warrants are options with a fixed maturity. At expiration, there will be a cash settlement (most common) or a distribution of the underlying share/instrument. Settlement is done automatically without any required action from the investor.

Warrants give the investor the possibility of earning money in both a rising and falling market. Issuers interested in listing warrants on Oslo Børs should note that both call warrants and put warrants can be issued, on either American or European terms.

An investor who believes in an increasing market would normally buy a call. On the contrary, an investor believing in a market decrease will buy a put. The holder of a put will gain more as the underlying falls.

Similar to standardised options, Plain Vanilla Warrants can be used to hedge existing positions or portfolios. It may also be used in combination with other warrants and underlying instruments for more complex strategies.

Mini Futures

Mini Futures are linear products that gives the possibility to profit in both a rising and falling underlying instrument. «Mini Long» would increase in a rising market, while «Mini Short» would increase in a falling market. Mini Futures does not have any predefined expiration date, but trades until it reaches its predefined stop loss level or any other type of trigger mentioned in its prospectus.

Financing level

A Mini Future consists of one part equity (its theoretical value) and one part financed by its issuer (financing level). For the part financed by the issuer, a daily interest is charged through adjustment of the financing level. Following this, the financing level increases daily for Mini Long and decreases for Mini Short. The value of a Mini Future is the difference between the underlying value and the financing level, and then multiplied by the ratio (number of underlying shares).

Stop loss

Mini Futures are constructed in a way that an investor cannot lose more than the invested capital. If the underlying value equals the financing level, the value of the Mini Future will be zero. A stop loss level is set shortly before this situation occurs. If the stop loss threshold is touched or penetrated, the Mini Future will expire immediately. In such an event, the issuer will calculate and reimburse any residual value. The stop loss level is adjusted according to the financing level, usually on a daily basis.

Leverage

The leverage of the instrument will fluctuate along with movements in the underlying asset and the financing level. The leverage can be calculated by dividing the value of the underlying with the value of the Mini Future multiplied by the ratio. The issuer will usually update the indicative leverage along with other data to Oslo Børs on an end of day basis. The leverage value should be considered indicative only and will usually be based on values from the last day close, or a certain time.

Example Mini Long

Price of underlying share ABC is NOK 100,-

Financing level is NOK 80,-

Number of instruments per underlying (ratio) is 2.

Theoretical value of Mini Long is (100-80)*2 = 40

Indicative leverage at this time would be (100/40)*2 = 5.

If the share price increases 1 NOK to 101, the Mini Long will increase by 2 NOK (1 x ratio) to 42 NOK.

Mini Long increases 5% while ABC shares increases 1%.

After the increase we will have a new leverage of 101/42 x 2 = 4.81%.

Example Mini Short

Price of underlying share ABC is NOK 100,-

Financing level is NOK 120,-

Number of instruments per underlying (ratio) is 0.5.

Theoretical value of Mini Short is (120-100)*0.5 = 10

Indicative leverage at this time would be (100/10)*0.5 = 5.

If the share price decreases 10 NOK to 90 the Mini Short will increase by 5 NOK (10*ratio) to 15,-

Mini Short increases 50% while ABC shares decreases 10%.

After the price decrease we will have a new leverage of 90/15*0.5 = 3%

Micro Auctions

The majority of ETN and Warrant products have a function called micro auction, corresponding to the closing/opening- auction in the stock market. The feature is a market maker protection that ensures that market makers can hedge their positions at the right price. This feature is mainly enabled to prevent high frequency algorithms from arbitrating on prices in the order book faster than the market maker can hedge. The micro auction will take place in a fraction of a second, which is sufficient for the market maker to be able to see if the underlying price has changed and thus have the opportunity to adjust the price if it is incorrect. By avoiding this type of arbitration, issuers can offer a tighter spread and a larger product portfolio, which will benefit end customers.

The auction is triggered every time the order book has matching or crossing prices. The difference from continuous trading is that an auction searches for the price that maximizes trading volume at one price, not trades on multiple levels. If you place a limit order with volume greater than and price higher/lower than the best level in the order book the entire volume will execute at the price at which the marginal volume is filled.

Example 1
You want to buy 20,000 BEAR AKERBP DNM at 6.07 and add a corresponding limit order. Given the order book below, the order is completed at this price, you will buy 20,000 at 6.07.

Example 2
You want to buy 70,000 of the same underlying and place a limit order to buy 70,000 at 6.20. The auction will then find the level that maximizes volume, ie 6.16. The entire trade of 70,000 will be executed at 6.16.

Example 3
You want to buy 100,000 of the same underlying and place a limit order to buy 100,000 at 6.30. Your order is greater than the available volume in the order book and your limit price will set the execution price. You will buy 75,000 to 6,30 and are left with a bid order in the order book with a limit of 25,000 at 6.30.

It is recommended that customers who wishes to trade large volumes relative to what is available in the order book is precise with what limit price one uses. If you wish to trade out more levels in the order book, it is recommended to use several limit orders.

Contact us

Eivind Sageng

  • Exchange Broker Derivatives
  • etp@oslobors.no
  • +47 22 34 17 38
  • +47 47 66 09 35