What Warrants to Buy in a Stagnant Market?
Mr Chin02/08/2019
The selection of a warrant usually depends on investors’ expectations of the price of an underlying asset, which means that bullish investors will choose call warrants while the bearish ones will choose put warrants. Inline warrants are designed for those who believe that the underlying price will move within a narrow range without a clear direction for a certain period of time; a market displaying these qualities are called a stagnant market.
Warrant investors probably know that the volatility of an underlying price is crucial to the warrant price. Experts usually explain the movement of warrant price using implied volatility. Theoretically speaking, the warrant price will rise as the implied volatility of the underlying price increases, and vice versa.
However, unlike call and put warrants, inline warrants reflect the expectation that the underlying price will remain relatively flat. In this case, the relationship between the movement of an underlying price and a warrant price is not applicable to inline warrants. In fact, the relationship between the underlying price movements and the price of inline warrants is rather complicated and indirect. It all depends on whether an inline warrant is in-the-range or out-of-the-range.
- If an inline warrant is in-the-range, which means its underlying price falls within the lower and upper strikes, its price will fall when the underlying price becomes more volatile since it will have a higher chance of falling out-of-the-range.
- If an inline warrant is out-of-the-range, which means its underlying price falls outside the lower or upper strike, its price will rise when the underlying price becomes more volatile because it will have a higher chance of falling in-the-range.
Unlike other warrants, inline warrants enable investors to benefit from the stagnant underlying price, and its price may go up or down when the underlying price becomes increasingly volatile.