There are various kinds of derivatives on offer within the Australian market, each offering different levels of leverage and flexibility. Many know of Exchange Traded Options but there is another which allows a trader to go long or short, but without the complexity of Options, they are called MINI Warrants (aka MINIs).
If you’re trading in the short to medium term (anywhere from a day to about six months), it’s also worth exploring MINIs as an alternative to buying stocks, this is due to the amount of leverage they afford you, so as long as you get the direction correct, the trade will result in higher gains (and subsequently higher losses if you get the direction wrong).
MINI Warrants are issued by CitiFirst and are listed on both the ASX and Chi-X markets. There are two types of Mini Warrants:
- MINI Long, which profits from rising stock prices
- MINI Short, which profits from falling stock prices.
Each Mini Warrant has a unique six-digit code that you can use to look up and trade via your trading platform.
Why MINI Warrants?
MINI Warrants come with a range of strike price and gearing amounts, allowing you to adjust your leverage to match your risk tolerance. For example, let’s take a look at one of the more leveraged MINIs on CBA, which has the code ‘CBAKOF’. This MINI Warrant has 86.55% gearing, meaning Citigroup funds 86.55% of the stock price ($120.67), while you only fund the remaining $18.75.
MINIs also come with a built-in stop-loss feature. In the case of the CBAKOF, if the stock price falls to $135.36, you’ll be stopped out and the remaining value will be returned to you.
As a derivative, MINI Warrants move in sync with the stock price, meaning that if you enter at $18.75 and the stock goes up by $1.00, your trade would be worth $19.75. Similarly, if the stock drops by $1.00, your trade would be worth $17.75. To achieve the same percentage return by simply buying the stock – you would need a significantly higher capital outlay, which is where leverage comes in.
The Role of Leverage
Leverage can significantly magnify your gains—or your losses. For instance, with MINI Warrants, a 2% increase in the stock price can result in a 12.04% gain in your trade. But if the stock price moves against you by 2%, you could face a 12.04% loss.
While leverage can be a powerful tool, it requires careful management. Every trade should be guided by strict money management rules, and it’s crucial to have your own technical stop-loss in place as well.
Downsides to Mini Warrants
The primary downside to MINI Warrants is that they don’t come with the dividends or voting rights you get from owning the actual stock. However, if you’re trading in the short to medium term, this likely won’t be a significant concern.
MINI Warrants can be a great product for traders, especially if you see the value in going short and using leverage. However, this product requires skill in predicting market direction. If you’re interested in learning how to trade or improving your strategy with MINI Warrants, they are covered extensively in our Trading Foundations program.