Warrant Product Groups

The value and volatility of the underlying asset/indicator is the primary factor with an influence on the market value of warrants during their term. The level of market volatility is largely determined by the prices of the instruments which offer investors protection against such market volatility, in addition to the measurement of the actual volatility. The prices of these instruments are determined by forces of supply and demand in the options and derivative markets generally. These forces are, affected by factors such as actual market volatility, expected volatility, macroeconomic factors and speculation.

When it comes to evaluating a warrant, the values typically taken into consideration are leverage, days to maturity and delta.

The table below shows the product groups of our warrants by delta and the days remaining until the maturity. As a rule of thumb, the lower the delta and the shorter the maturity, the higher the risk of total loss. Calls and puts with a very low delta and a few days to maturity are particularly risky.

What is Delta?

Delta can be best described as a sensitivity metric. It indicates how much the warrant's price will change if the underlying asset goes up or down by one unit. Delta is therefore not constant, but a variable metric and is approximately calculated based on the Black-Scholes model. For call warrants, the value of delta is between 0 and 1. For put warrants, the delta value is between -1 and 0.

Let’s assume, for example, that a call warrant on a Turkish stock has a delta of 0.75 (or 75%). The ratio is 0.50. Should the price of the stock change by 1 TRY, the warrant would change by (0.75 x 0.50) 0. 375 TRY. For more details on delta, you can read the article “What is the Delta of warrants”?

Warrants’ “in the money”, “out of the money” and “at the money” status on the maturity

Call Warrant

In call warrants, as long as underlying asset/indicator settlement amount at the end of maturity is higher than the strike, the investors shall receive a cash amount representing the warrant amount without any further notice. However, if the underlying asset/indicator settlement amount at the end of maturity is equal to or lesser than the strike, the investors holding the warrants shall not gain any profits from their investments.

At the end of the maturity, the warrants are in profit, in loss or even as follows:

Underlying Asset/Indicator Settlement Amount at the end of Maturity > Strike = In profit

Underlying Asset/Indicator Settlement Amount at the end of Maturity = Strike = Even

Underlying Asset/Indicator Settlement Amount at the end of Maturity < Strike = In loss

In call warrants, if the warrant is in profit at the end of maturity, the difference between the underlying asset/indicator settlement amount at the end of maturity and strike shall be paid to the warrant holder in cash. If the warrant is in loss or even, no payment shall be made and the warrant shall be redeemed without value.

Put Warrant

In put warrants, as long as underlying asset/indicator settlement amount at the end of maturity is lower than the strike, the investors shall receive a cash amount representing the warrant amount without any further notice. However, if the underlying asset/indicator settlement amount at the end of maturity is equal to or higher than the strike, the investors holding the warrants shall not gain any profits from their investments.

At the end of the maturity, the warrants are in profit, in loss or even as follows:

Underlying Asset/Indicator Settlement Amount at the end of Maturity < Strike = In profit

Underlying Asset/Indicator Settlement Amount at the end of Maturity = Strike = Even

Underlying Asset/Indicator Settlement Amount at the end of Maturity > Strike = In loss

In put warrants, if the warrant is in profit at the end of maturity, the difference between the underlying asset/indicator settlement amount at the end of maturity and strike shall be paid to the warrant holder in cash. If the warrant is in loss or even, no payment shall be made and the warrant shall be redeemed without value.

Calls & puts „in the money“

A call on stock A is "in the money" if the stock's current price is higher than the strike price of the call. With an assumed base price of 23 TRY, this call is always “in the money” if the share price is higher than 23 TRY.

With this call, you have the right to buy the share at a price of 23 TRY during or at the end of the term of the call, even if the share price is above 23 TRY. This difference between the strike price of the call and the price of the stock is called the intrinsic value of the warrant.

A put on that stock is "in the money" if the stock's current price is below the strike price of the put. With the assumed strike price of 23 TRY, this put is always “in the money” if the share price is below 23 TRY.

This put gives you the right to sell a share at a price of 23 TRY during or at the end of the put's term, even if the share price is below 23 TRY. Every warrant "in the money", both call and put, always has an intrinsic value.

Calls and puts „out of the money“

A call is „out of the money“ when the strike price of the call is higher than the price of the underlying asset. With the assumed base price of the call of 23 TRY, this call is always “out of the money” if the share price is lower than 23 TRY.

A put is "out of the money" when the strike price of the put is below the price of the underlying asset. Assuming the strike price of the put is 23 TRY, this put is always “out of the money” if the share price is higher than 23 TRY.

An “out of the money” warrant does not have any intrinsic value.

Calls and puts „at the money“

Both a call and a put on a stock are „at the money“ if the stock's current price is equal to the warrant's strike price. If the share is quoted at exactly 23 TRY and the base price of the call or put is also 23 TRY , this warrant is “at the money”. A call or put with a base price of 23 TRY gives you the right to buy or sell a share at a price of 23 TRY. But if the share price is exactly 23 TRY, you have no advantage. An “at the money” warrant has no intrinsic value.

Delta and risk

As a rule of thumb, the further „out of the money“ the warrant is, the closer delta is to zero. On the other hand, warrants "in the money" tend to have higher deltas than warrants "at" and "out of the money". If the warrant is clearly "in the money", the delta is very close to the values -1 or 1. If the value is 0.5 or -0.5, then the warrant is close to being "at the money". In this particular case, the strike price is exactly the value of the underlier‘s price.

Days to maturity and risk

The „days to maturity“ of a warrant refer to the period until the expiration date of the product. During this period, the investor has the right to buy or sell the underlying asset. At the latest on the day of maturity, it is decided whether the buyer or seller was able to realize a profit.

In case of a warrant that is „out of the money“, the chances of the underlying asset to move in the desired direction are higher, the longer the term to maturity is. All else equal, the time value and thus also the price of a warrant will fall as the term to maturity decreases. On expiration date and time, the time value of a warrant is 0. It only holds its intrinsic value. Hence, warrants with less than 15 days until maturity are categorised as the products that pose the highest risk.