Key Points to Consider in Options Trading

What is a Warrant?

A warrant is a financial instrument traded on the stock exchange that allows investors to evaluate their expectations regarding the future price movements of a specific underlying asset (such as an index, stock, or currency). For example, if you think the BIST 30 index may rise, you can buy a call warrant with a bullish expectation. Conversely, in the case of a bearish outlook, you can opt for a put warrant. If the price moves in the direction you anticipated, the warrant price will increase rapidly due to leverage effect.

Factors to Consider When Choosing a Warrant

To succeed in warrant purchasing, making the right selection is crucial. In this regard, filter screens are your most important tool. Filter screens list suitable warrants based on the direction (bullish or bearish) and maturity expectations set by the investor, simplifying the selection process. First, you should determine the direction based on your investment expectations, and then select the appropriate maturity and strike price.

Warrant Analysis and Parameters

Key parameters to consider when purchasing warrants include delta, theta, gamma, and vega. Here are the functions of these parameters:

• Delta: Indicates the directional sensitivity of the warrant. For call warrants, it has a value between 0 and +1, while for put warrants, it ranges from 0 to -1. When the delta value is around 0.5, the warrant is at the breakeven point.
• Effective Leverage: Indicates the effect of a 1% change in the underlying asset on the warrant. When this value is high, the potential for profit increases, but the risk of loss also grows.
• Theta: Shows how much the value of the warrant will decrease as the expiration date approaches. This is a negative effect as the value of the warrant decreases over time.
• Vega: Measures the sensitivity to changes in volatility. When volatility increases, warrant prices also rise.

Market Maker Spread

The difference between the buy and sell price of a warrant is called the market maker spread. The narrower this spread, the higher the liquidity of the warrant. An ideal spread range for healthy trading of a warrant is between 5-10%.

It should be remembered: Careful analysis and consideration of market conditions when purchasing warrants will reduce potential risks.