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DW
DW Introduction
Derivative Warrant (DW) is a financial instrument that requires a small initial investment but yields high returns. Profits can be made during both market ups and downs.
DWs are distinctive in that they have effective gearing which helps enlarge the capital gains.
What is a DW?
A DW is a financial product that gives the holder the right to buy (Call DW) or sell (Put DW) the underlying asset at a predetermined quantity, price, and date.
What are Call DW and Put DW?
Call DW
A Call DW gives the holder the right to buy the underlying assets. The price of Call DW will follow the underlying price.
When the underlying asset's price goes up, the Call DW holder will profit from the price difference.
Put DW
A Put DW gives the holder the right to sell the underlying assets. The Put DW's price moves in the opposite direction of the underlying asset's price.
When the price of the underlying asset falls, the Call DW holders will profit from the price difference.
What are Call DW and Put DW?
Call DW
A Call DW gives the holder the right to buy the underlying assets. The price of Call DW will follow the underlying price.
When the underlying asset's price goes up, the Call DW holder will profit from the price difference.
What are Call DW and Put DW?
Put DW
A Put DW gives the holder the right to sell the underlying assets. The Put DW's price moves in the opposite direction of the underlying asset's price.
When the price of the underlying asset falls, the Call DW holders will profit from the price difference.
DW advantages
Require a small investment
Trading by using the stock trading account
Profits can be made
during both market ups and downs.
DW Risks
Limited life: DWs typically have a limited life, ranging from two months to two years. The DW price will decline over time and eventually fall to zero when it reaches out-of-the-money status.
Gearing risk from leverage: DWs are leveraged products and can change in value rapidly according to the gearing ratio relative to the underlying assets. This means that the potential profit and loss are greater when compared to trading directly in the underlying asset.
DW symbol
What are DW underlying assets?
| Thai securities that are constituents of the SET50 index and rank 51 to 100 on the SET100 index |
| Foreign securities (e.g., Alibaba, Tencent, Meituan, Xiaomi, JD.com, Great Wall Motor) |
| Thai stock indexes (SET50, SET100, and SETHD) |
| Foreign stock indexes (e.e., Hang Seng Index, Hang Seng TECH Index, Dow Jones Industrial Average) |
DW news update
Key vocabularies
Effective Gearing (Eff. Gearing)
Effective gearing refers to the potential multiplying effect on the price of the DW in response to a 1% change in the underlying asset price.
Delta
Delta is a dynamic indicator that measures how much a DW's price would change if the underlying price moved by one baht
Historical Volatility (H.V.)
Historical volatility assesses the volatility of underlying securities by calculating percentage changes over the previous 91 days
% Outstanding (% O/S)
% outstanding refers to the proportion of derivative warrants held by investors in relation to the total number of DWs listed on the stock exchang
Implied Volatility (I.V.)
Implied volatility is a metric that employs the Black-Scholes Model to determine a DW's expected fluctuations.
Leverage
An investor typically invests a small amount of money in a derivative warrant and leverages it to increase his/her buying power in the market. Since leveraged positions magnify both gains and losses, the investor has the potential to earn large returns or suffer massive losses
Factors influencing the price of a DW
| Call DW | Put DW | |
| Underlying price | If the price of the underlying asset rises, so will the price of the Call DW. | If the price of the underlying asset rises, the price of the Put DW will fall |
| Time to maturity | The longer the remaining time, the higher the price of the Call DW and Put DW. On the contrary, the shorter the remaining time, the lower the warrant price. | |
| Volatility | The higher the volatility of the underlying asset price, the higher the price of the Call DW and Put DW. On the contrary, the lower the volatility, the lower the warrant price. | |
FAQs
A market maker is in charge of making it easier for investors to buy and sell DWs at the right price to keep the market liquid. Market makers typically perform their duties as agreed with the DW issuers, but in certain circumstances, such as when the warrant price falls below 0.05 baht or the time to maturity is less than 14 days, they may be exempted from their duties. Investors can find out more about the market maker’s roles and responsibilities in the DW prospectus.
DW has 3 statuses: In The Money (ITM), At The Money (ATM), and Out of The Money (OTM)
- In-the-money DW means the warrant holder earns capital gains from the price difference
- At-the-money and out-of-the-money DW means the holder does not earn any capital gain from the price difference
DW price comprises two components: Intrinsic value and time value
- Intrinsic value is used to determine the difference between the current price of the underlying asset and the exercise price of an ITM warrant, to calculate how much profit it currently makes.
- Time value refers to the portion of the DW price due primarily to the amount of remaining time towards maturity. A warrant's value typically declines as it approaches its maturity because there is less time for the underlying security to move in a favorable direction.
The remaining time is important because the less time there is, the lower the value of the warrant.
The last trading day is the last day on which holders can trade DW on the Stock Exchange.
The maturity date is the date on which holders receive the cash settlement (if it is an ITM-DW). The holder must pay tax on the amount by including it into the taxable revenue in the annual income tax.
The DW price is made up of two components: intrinsic value and time value. While the underlying security price rises, the time value of DW will gradually decrease up to the maturity date. Sometimes the rise in the price of the underlying security and the fall in the time value cancel each other out, resulting in no change in the price of the DW. In addition, when the DW moneyness is deep out-of-the-money (OTM), the DW price will not correlate with the underlying security price.
If the underlying security undergoes a corporate action, the DW issuer will adjust the exercise price or exercise ratio to protect investors' rights. The issuer will make these changes public in their Information Memorandum.
If an investor holds the DW until maturity and profits from the price difference (in-the-money), he will receive a cash settlement and must pay tax on the amount. On the other hand, if the investor does not make a capital gain from the price difference, he will lose the entire purchase price of the DW. As a result, the issuer usually advises holders to sell their DWs before or on the last trading date (in other words, before the maturity date).
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