Covered warrant is a secured asset issued by a securities company that allows the owner to buy (call warrant) or sell (put warrant) the underlying asset to the warrant issuer at a specific price by a predetermined date or receive the margin between the exercise price and the underlying price at the exercise date.
There are two ways you can buy covered warrants:
- Option 1: You can register to buy covered warrants when the issuer of warrant offers them on the primary market (right after it receives the offering certificate from the State Securities Commission)
- Option 2: You can buy covered warrants on the secondary market (after they are listed on the Stock Exchange)
You use your own stock trading account to buy/sell covered warrants when they are listed on the Stock Exchange.
Trading time, trading method, trading orders, price determination principles and trading units are similar to the underlying stock. However, there are some typically different rules from stock trading as follows:
Tick size: VND10 for all covered warrant prices
Daily ceiling/floor price of covered warrant: Based on the trading band of underlying asset and determined by the formula:
Ceiling/floor price of covered warrant = Reference price of covered warrant +/- trading band of underlying asset /conversion ratio
The conversion ratio tells you how many covered warrants you need to exchange for an underlying asset
Example: If the conversion ratio is 10:1, you need to own 10 covered warrant to buy one underlying asset.
A floating covered warrant has different price types, with each carrying specific meaning. So, you need to discern them.
Exercise price (or strike price) is the price that owner of covered warrant can buy/sell the underlying asset from the warrant issuer when the covered warrant reaches its expiry date. The exercise price also is a base for you to compare and determine your trading status and measure your profit earned/loss suffered from your investment.
This price will be announced by the warrant issuer when it offers to sell the covered warrant.
Typically, exercise prices will be kept unchanged throughout the duration of covered warrant and only changed in some cases, e.g. the underlying asset has a corporate action event.
The settlement price is the price determined and announced by the Stock Exchange before the expiry date of the covered warrant.
The differential between the settlement price and the exercise price tells how much profit you earn or how much loss you take on the expiry date of such covered warrant. This is also base for the warrant issuer to pay you a margin when you exercise the rights.
The settlement price of the covered warrant is the average closing price of the underlying asset in five consecutive days prior to the expiry date, excluding the expiry date.
The warrant price (also called the price of a warrant) is the cost you have to spend on the covered warrant. At the time of issuing, the warrant price is the offering price quoted by the issuer of such covered warrant. When it is listed and traded on the Stock Exchange, it is the traded price.
When the covered warrant is valid, you can buy/sell covered warrant on the Stock Exchange to take margin/stop loss of covered warrant trading.
Or, on the expiry date, if you own profitable covered warrants, you are entitled to send a request on covered warrant execution and you will get cash equal to the differential between the settlement price and the exercise price. The payment for customers is completed in five working days from the date you place an order to exercise the warrant or from the expiry date.
In case you do not place a request to exercise the rights to your profitable covered warrants, the issuer shall still pay you for these covered warrants.
You buy 1,000 call warrants to buy the VNM stock with the following information:
Current price of VNM (underlying)
The total money you spend on this deal = 1,000 CW * 1,000 VND = 1,000,000 VND
- After three months:
Assuming that the market price of VNM is 155,000 VND, the market warrant price is 1,500 VND. You can sell your warrants on the Stock Exchange to take profit.
Your profit = 1,000 CW x (1,500 VND - 1,000 VND) = 500,000 VND
- On expiry date:
Assuming that you hold the warrant till the expiry date and the calculated and announced settlement price of VNM is 165,000 VND.
The issuer shall pay you: 1,000/5 * (165,000 VND – 150,000 VND) = 3,000,000 VND
Your profit = 3,000,000 VND - 1,000,000 VND (the initial cost for CW) = 2,000,000
Nevertheless, if the calculated and announced settlement price of VNM is lower than or equal to 150,000 VND (exercise price) -> The differential of the settlement price and the exercise price is lower or equal to 0 VND. Your warrants will not be exercised and you will lose your money invested in the warrants (1,000,000 VND).
Covered warrant (CW)
Market maker, regulator
Between issuer and investors
Open selling position
Initial money requirement
Fee for buying warrants
Initial margin deposit
When you own covered warrants of an underlying stock, you do not have any rights in connection with the company as its shareholders. Therefore, you cannot cast vote at its meetings, receive its dividends, buy its secondary shares, receive bonus shares from the company that issues the underlying stock. If the company has corporate actions, the warrants you own will be adjusted to the exercise price and conversion ratio.
The CW price is not adjusted when the underlying asset has corporate actions (dividend, secondary share issue). However, the exercise price and the conversion ratio of the covered warrant will be adjusted. Adjustment methodology and information disclosure obligations in connection with CW adjustment are specified in the prospectus of the issuer
Adjustment formula for the exercise price and the conversion ratio:
+ New exercise price = Old exercise price * (Adjusted reference price of the underlying asset at the ex-rights date/unadjusted reference price of the underlying asset at the ex-rights date)
+ New conversion ratio = Old conversion ratio * (Adjusted reference price of the underlying asset at the ex-rights date/unadjusted reference price of the underlying asset at the ex-rights date)
The personal income tax on covered warrant trading is calculated as follows:
- Before the expiry date: 0.1 % * (Traded price of CW * Number of CW)
- On the expiry date: 0.1% * (Settlement price of underlying asset * Number of CW/Conversion ratio)
Example: You bought 100 CWs on the stock ABC with the conversion ratio of 2:1, exercise price of 133,000 VND:
- Before the expiry date: You sell on the secondary market at 11,000 VND per CW, and the personal income tax will be: 11,000 * 100 * 0.1% = 1,100 VND
- On the expiry date: The settlement price of the underlying security is 155,000 VND, and the personal income tax will be: 155,000 * 100 /2 * 0.1% = 7,750 VND.