GOLDEN RULES FOR TRADING COVERED WARRANTS
For those of you completely new to covered warrants, the bare minimum you need to know to get started is that there are two types of warrant – “Call” warrants, the prices of which tend to rise as the underlying on which they are based rises, and “Put” warrants, which tend to rise when the underlying falls.

So if you think a particular share, index, currency or commodity will rise - buy a call warrant; if you think it will fall – buy a put warrant. After that- spot an opportunity to sell your warrant and take your profits!

For those who wish to learn more about covered warrant trading, the following pointers should be useful.

• Have a clear investment view
  
  

  As the performance of the underlying share is one of the key elements in determining the warrant's price, investors must choose warrants based on an underlying asset  for which they have a clear investment view. If you think you know where blue-chips like Vodafone or GlaxoSmithKline are likely to trade, stick to trading warrants on these stocks. Alternatively, if you feel you know where the commodity or currency markets are heading - there are plenty of SG warrants to chose from.

• Learn to use gearing to your advantage
  
  

  "Effective gearing" is a measure of the extent to which a warrant magnifies movements in the underlying security. A warrant with an effective gearing of 2x, will be twice as volatile as the underlying asset. A warrant with effective gearing of 20x will be twenty times as volatile as the underlying. Use these highly geared warrants with extreme caution!

  It is important to remember that a warrant with a high level of effective gearing is considered to be risky.  It can generate high returns but also great losses depending on which way the underlying asset moves. The golden rule is not to be too greedy with effective gearing. Warrants that are the most appropriate for short term trading are those where the exercise price is relatively near the underlying price (within 20% for instance) with several months to go before expiry.

• Avoid warrants with large bid / ask spreads
  
  

  Some warrants - typically call warrants where the exercise (or "strike" price) is far above the current underlying price - have very low ask prices (ie they cost less than 0.4p to buy) reflecting the fact that they are almost worthless. The price you can sell them at - the bid price - is even less ( ie 0.01p). This means you would make an instant 75% loss if bought then sold.

• Know when to take profits and when to cut losses
  
  

  If your market view has been confirmed and your warrant has risen strongly, look for an opportunity to close out your position.  In order to optimise your performance it could be better to sell this particular warrant and later buy another warrant with an appropriate gearing level.

• Use limit orders to your advantage
  
  

  When an investor puts through a "market order", the order will be executed at the price currently quoting on the market.  Alternatively you can use a "limit order". Limit orders can be considered as  "no worse than orders"  i.e the investor sets a price above which he/she is no longer ready to buy and a price underneath which he/she no longer desires to sell. You will not be invested in the warrant, however, until your limit has been hit.

• Look out for time decay
  
  

  As expiry approaches, a warrant quickly losses time value. This makes short dated (ie less than one month to expiry) warrants more risky. Investing in a warrant with a longer expiry will be more expensive than a similar warrant with a closer expiry (as there is more time value) but will protect you more efficiently against the effects of time decay.

• Use all the tools at your disposal
  
  

  The SG Warrants website, www.sgwarrants.co.uk has a great deal of information on product guides, trading strategies as well as useful tools such as technical analysis and a Warrant Selector. This last tool in particular can help you select the most relevant warrant for your investment scenario and is available at www.sgwarrants.co.uk/tools/