How to Find the Best Discount Put Warrant
Investors should develop a differentiated market assessment before buying a discount put warrant, as this product is particularly suitable for moderately falling markets. The position of the price of the underlying in relation to the base price and cap is the control instrument for individual risk tolerance or expected returns. In principle, two strategies can be distinguished.
Investors who want to pursue a more defensive strategy choose a discount put warrant with a cap equal to the current price of the underlying. In this constellation, falling prices are no longer the focus of interest, but the continuous gain in time value with constant or stagnating prices.
A more offensive strategy is appropriate if investors expect the price of the underlying to fall and therefore choose a discount put warrant with a strike price that is equal to the current price of the underlying. In this constellation, the character of the discount put warrant corresponds more to a classic put warrant. In order to make a profit, it is important that the price of the underlying falls – the more, the better. Investors risk missing out on part of the potential return if the underlying price falls below the cap.
When choosing a discount put warrant, investors should ensure that the product has a sufficiently long term so that the expectation of falling prices can be reflected accordingly. Due to the option components it contains, the discount put warrant does not initially react as strongly to falling prices as a classic put warrant, especially if the remaining term is long. Until the end of the term, the price of the discount put warrant can be observed to increasingly approach its intrinsic value.
From an empirical point of view, price declines often occur faster and more violently than price increases – this is why the implied volatility expected by the market and reflected by the option prices tends to rise in phases of falling prices, while it tends to fall when prices rise. Therefore, if their expectations materialize, holders of put warrants can benefit both from the falling prices (Delta key figure) and from the increasing volatility (Vega key figure) – although this effect is significantly lower than with a classic put warrant.
Tip: Overall, discount put warrants have proven to be a robust alternative to classic warrants or knock-out products, especially for newcomers to warrant trading.