Protecting your portfolio

Before trading you should fully understand the nature of covered warrants and your exposure to the risk involved. The geared nature of covered warrants means that a relatively small movement in the share price of the underlying asset will result in larger movements in the value of the warrant. Therefore, covered warrants provide the opportunity for greater returns than ordinary share dealing but also greater risks and potential losses. If you are in any doubt you should consult an Independent Financial Advisor.

Covered Warrants can be used to protect a portfolio against falling markets. If an investor owns a portfolio of UK stocks and believes prices have a negative out-look in the short-term, but does not want to sell them, a Put Warrant on the FTSE 100 could provide a good alternative.

As the FTSE 100 falls, the increasing value of the investors’ Put Warrant will compensate some or all of the loss from the reduction in value of the shares. In this way, Put Covered Warrants can help to protect a portfolio against adverse market falls.

If concerns are unfounded and the markets rise, the investor will continue to benefit from the increase in share price and the Put Covered Warrant will expire worthless. The capital invested in the Put Warrant will be lost in this instance.