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Spread Warrant

Category — Structured Products
This type falls in the category of structured products with leverage.

The income on a spread-warrant is limited, while investor can lose everything. It is designed for an investor who expects a limited growth (bull spread) or a limited fall on an underlying asset (bear spread) and a low volatility of the underlying asset price.

A bull spread-warrant allows the investor to earn maximum income at the closing price higher the upper exercise price (upper strike). If the underlying asset price is considerably higher than the upper strike, the investor’s income will not increase. At closing at the level or lower than the lower exercise price (lower strike), the investments will be lost.

Bear spread-warrant offers a vice versa scheme: the investor expects the closing of the underlying asset price at the level of lower strike. If the forecast is wrong, the investor loses their money with the underlying asset price higher or at the level of the upper strike.

The advantage of a spread-warrant is that the investor pays less than the underlying asset price, and he gets the opportunity to earn in the “sideway” market. It gives the leverage effect.

Example. An investor with capital of $ 100 expects that an Apple share, which now is $ 100, will grow in price by $ 3 during a month, and it will not be less than $ 97. The investor can lose or earn $ 3, but he has to spend $ 100 to participate in the strategy. Instead of that, he can buy spread-warrant, whose price is far lower. The price of spread-warrant depends on the underlying asset price, strikes, volatility, warrant term and interest rates. Let’s assume it will be $ 3, in other words the investor doesn’t spend $ 100 while he has the same opportunity to earn. In the same way, the investor can double the invested sum. He can invest the other $ 97 in other assets or buy a spread-warrant for the whole capital and double the capital.
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