Mini July 2018

Mini warrants, or “Minis” are leveraged trading products that can be used in a similar way to options – to benefit from rising or falling prices.

Minis come as either a “Mini long” which is bought with the expectation of a rising price (similar to a call option), or a “Mini short” which is bought with the expectation of a falling price (similar to a put option).

“Minis” are quite easy to value – with the value of a Mini long equal to the value of the underlying asset (usually a share price) less the strike price of the mini. The value of a Mini short is, therefore, the value of the strike price less the value of the underlying asset (or share price).

In this way, Minis are either “delta 1” or “delta -1”. This means that for each 1 cent move in the underlying, there is a 1 cent move in the Mini warrant.

Mini warrants also have a built-in stop-loss feature. The stop loss is usually a level just beyond the strike price, which when reached, will automatically close the mini out. The holder of the mini warrant is then entitled to the remainder of the value of the mini.

Pricing a Mini Long

Consider that BHP is trading at $33, and there is a Mini long with a $30 strike price.

The value of this Mini is, therefore, $3.00 ($33 BHP price – $30 strike price).

If BHP goes to a $33.50 share price, the mini will now be $3.50. For each cent BHP rises, its Mini longs will also rise a cent.

Pricing a Mini Short

Consider that BHP is trading at $33 and there is a Mini short with a $35 strike price.

The value of this Mini is, therefore, $2.00 ($35 strike price – $33 BHP price).

If BHP falls to a $31.00 strike price, the mini will now be worth $4.00 ($35 – $31). For each cent BHP falls, its Mini shorts will rise a cent.

The pricing of minis is therefore quite definitive – with the mini issuers making money off the bid-ask spread (usually a couple of cents), as well as an interest rate, that is priced in by slowly raising (mini longs) or lowering (mini shorts) the strike price of the Mini.

There are many advantages to using Minis, including the ability to gain leveraged exposure to underlying products that are often difficult to trade. These include currencies, commodities, smaller ASX listed stocks, and foreign stock market indexes.