Trading of derivative warrants (DWs) is expected to rise twofold this year, supported by the stock market's bullish outlook and the reasonable price structure of DWs, says Kasikorn Securities (KS).
DW trading is very active when the stock market is experiencing high volatility and has a clear direction of an upside gain or a downside loss. DWs can generate profit through calls, when the market has upside momentum, or puts, when the market falls.
"Investors are more knowledgeable about DWs and they can compare prices and pick up a good one for investment," said KS assistant managing director Sutthisit Jamdee.
"Most of today's DW prices have structured a low time decay, but other factors affecting prices are financial liquidity and an effective gearing [ratio]," said Mr Sutthisit.
If a DW product has a high effective gearing ratio, this means it is equipped with high volatility in terms of investment risk and return.
"Mostly DWs in the Thai stock market are call DWs, and put DWs are not favourable, but both kinds of DW products are active in the global stock markets," said Mr Sutthisit.
KS favours investment in call DWs as the Thai bourse remains on an upward trend. He said DWs had an average daily trading volume at 2.7% of the Stock Exchange of Thailand's trading valuation.
DW trading used to peak at around 5% in 2015, but such trade had declined over the past two years because of limited volatility in the stock market and how most DW prices were structured with a high time decay, causing a short-term holding of DWs as their prices would drop sharply after a stipulated period, said Mr Sutthisit.
KS was the first brokerage to launch the DW "time stopper" two years ago, making investors hold the investment product for at least two weeks. It also plans to use financial technology to select top DW products and manage liquidity for greater efficiency.