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Investment strategies for warrants

Warrants can be a valuable tool to help investors achieve their investment goals – they can potentially increase income, provide capital growth, or protect from a fall in value of an existing portfolio or portfolio diversification.

Examples of warrant investment strategies

Warrants can provide leverage and diversification, and can help you build your portfolio or gain exposure to market movements. However, everyone’s needs are different, and some warrants and strategies can involve high levels of risk that you need to understand. Before you invest, you should carefully assess your experience, investment objectives, financial resources and risk appetite, and discuss them with an accredited derivatives adviser.

Strategy
Seeking simple leveraged exposure to potential capital gains and/or dividends without margin calls.

Warrant type
MINIs - For a portion of the cost of buying the underlying securities, investors can participate in movements in the underlying securities as if they were holding them directly. Leveraged exposure is available for shares, indices, currencies and commodities, depending on the type of warrant.

Traders can buy a MINI Long when seeking to profit from a rise in the underlying asset’s price or buy a MINI Short when seeking to profit from a fall in the underlying asset’s price.

Strategy
Seeking increased exposure to potential capital growth, and any dividends and franking credits within self-managed super funds (SMSFs).

Warrant type
Instalment warrants - A popular tool to use for leverage within a SMSF due to the limited recourse nature of the loan.

You should seek independent professional tax advice to determine if you are entitled to franking credits, as individual circumstances may vary.

Strategy
Seeking enhanced dividend yield and franking credits with less capital than would be usually required from investing directly in shares.

Warrant type
Instalment warrants – Using the same capital investment, investors can qualify for multiple dividend payments and franking benefits. The strategy involves purchasing instalment warrants prior to the ex-dividend date, and holding them for 45 days plus a period to allow the share price to recover after going ex-dividend. The process is then repeated with a new selection of instalments.

You should seek independent professional tax advice to determine if you are entitled to franking credits, as individual circumstances may vary.

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Strategy
Seeking to profit from a falling market.

Warrant type
Put warrants: Purchasing put warrants can provide you with an investment vehicle that can profit from a falling market without the risk of margin calls.

You can trade on anticipated declines in the value of individual securities.

You can also trade on anticipated general market declines with a put warrant on the price movement of an index.

Strategy
Seeking to make new investments without investing more capital or realising existing holdings. Your goal could be to avoid triggering a CGT event or to improve portfolio diversification.

Cash extraction factsheet

Warrant type
Instalment warrants - Involves lodging shares you already hold with the warrant issuer and in return receiving an equivalent number of instalments plus a cash payment.