Structured warrants cost a fraction of the price of their underlying security and allow investors to gain exposure to this underlying security without actually owning it. The fact that you can trade structured warrants with a considerably smaller investment outlay gives rise to a variety of warrant strategies.
Leverage
One of the most attractive features of structured warrants is the leverage effect that they can offer. Once the investor has established a strong view on the movement of the underlying security, he/she can buy a structured warrant, which costs a fraction of the price of the underlying security. As such, structured warrants present the advantage of limiting the losses to the price paid while offering unlimited directional exposure to the underlying security. (However, investors should remember that the potential pay-off of put warrants is limited due to the fact that the value of the underlying security cannot fall below zero.)
Cash Extraction
Another interesting strategy involving structured warrants is cash extraction. By replacing the shares in the portfolio with structured warrants, investors are able to extract cash while maintaining an equivalent level of exposure to the underlying securities.
Hedging
So far we have been talking about call warrants. What about puts? A popular strategy involving put warrants is the hedging of a portfolio, i.e. protecting the portfolio's value against a market correction.
Put warrants can act as an insurance policy as they guarantee a minimum value for the underlying security (which is equal to the strike). The price of the protection is the warrant price paid. Should the market fall, the value of the portfolio will decrease. However, this loss can be partially or fully offset by the appreciation of the put warrants.
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