Warrants trading reaches record levels on Chi-X
Australia has seen a spike in warrant trading as investors look to capitalise on market volatility.
Record numbers of Australians aren't just buying stocks in 2020, they're also taking a punt on more complex derivative products like warrants.
Trading volumes for warrants on Chi-X, Australia's second-biggest securities exchange, have doubled since December, reaching an average of $4 million a day, according to new data.
CEO of Chi-X Australia Vic Jokovic said the market volatility of recent months has created a spike in demand for warrants, especially those that track Australia's benchmark S&P/ASX200 index.
“These products have become highly sought after as investors take a directional view of highly volatile markets,” Jokovic said.
While you'd normally profit if a stock market rises by investing in products like exchange traded fund (ETFs), warrants also allow traders to profit if the market is falling – a strategy known as "shorting" the market.
With the ASX200 rallying in recent months despite COVID-19 uncertainty, some traders will have bet on stocks reversing (and subsequently lost money).
The increase in demand has seen Citigroup, Australia's biggest issuer of warrants, launch 131 new MINI warrants onto the Chi-X in June.
What are warrants?
Warrants are investment products that are traded over an exchange.
Similar to options, they're contracts that allow traders to profit from the price movements of stocks, ETFs, commodities, currencies or market indices within a specified time frame.
Depending on your strategy, there are different types of warrants available, including MINIs, endowments, instalments, equity and index warrants.
Unlike stocks or ETFs, warrants have built-in leverage that allows investors to take long or short positions. This means that both gains and losses may be magnified.
What trends are we seeing in 2020?
Brendan Wills, Director at Citigroup Global Markets Australia, told Finder there have been a growing number of traders using warrants that track stock market indices.
"Traders have been using Index Minis, which give them exposure to futures via the ASX200, to take a directional view of the broader market – going long or short," he said.
"Similarly, offshore indices such as the US S&P500 futures have increased in popularity since February, as markets continue to be volatile, and dictated by macro and geopolitical events."
We're also seeing more traders taking a postion on local technology stocks such as Afterpay and Wisetech this year, according to Wills.
"The rally in these stocks has been phenomenal and we are seeing strong appetite in both longs and shorts as the stock trades with big short-term volatility," he said.
Other trends include thematics, such as oil price Minis, and recession-proof stocks like Woolworths.
Why trade warrants on Chi-X vs ASX?
You can trade warrants on both the ASX and Chi-X; however, the warrants themselves are different on each market.
To work out which exchange you'll want to use, check out the list of warrants on both the ASX and Chi-X websites.
“All of the various warrants available to investors – from equity indices such as the ASX200, S&P500 and Nasdaq, commodities like oil and gold, through to single stocks and ETFs are all available on the Chi-X market," Jokovic told Finder.
The trade process itself is the same, but not all brokers allow you to trade on Chi-X.
To trade stocks and warrants via Chi-X, make sure the broker you're with offers access.
Among online brokers, platforms offering Chi-X include Bell Direct, CMC Markets, CommSec and Interactive Brokers.
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