Vertical Financial Solutions talks MINI warrants


by Carolyn Herbert

Transcription of Finance News Network with Chi-X Vertical Financial Solutions Senior Financial Advisors, Martin Woods and Michael Dulieu
Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from independent advisory firm, Vertical Financial Solutions to discuss trading MINI warrants are senior advisors, Martin Woods and Michael Dulieu.  Martin, Michael, welcome.
Martin Woods: Thank you.
Michael Dulieu: Thank you.
Carolyn Herbert: Martin first to you. Can you start by explaining to us the type of clients that you have.
Martin Woods: At Vertical Financial Solutions, we have a broad range of clients. Mostly self-managed superfunds, which would make up about 70 per cent of our client base, but we also have high net worth individuals and smaller investors.
Carolyn Herbert: What are the situations where a MINI might be useful for their investment needs?
Martin Woods: MINIs can be used in a number of scenarios. We find hedging is a great use of MINI, especially for larger portfolios that have a broad range of equities in their portfolios. And for smaller accounts, it’s a great way to build a portfolio that they may not be able to afford, by purchasing the stock outright.
Carolyn Herbert: Martin taking a look at specific examples. How do your clients use MINIs as an aggressive investment strategy?
Martin Woods: MINIs allow you to go overweight assets at certain times. In particular stocks, which are probably the most common traded MINI going around. If we want to be overweight a position, we can buy more MINIs which will give us more exposure to the underlying asset, than you would just by buying in the stock.
Carolyn Herbert: Michael now to you. What about using MINIs defensively?
Michael Dulieu: As an example, currently we have quite a lot of exposure to international stocks in the US. So what we’ve done is we’ve chosen to take a short position on a MINI short, on the Dow Jones index. So that allows us to offset any falls in the US market, will be picked up with gains on that MINI warrant.
Carolyn Herbert: MINI longs and MINI shorts both have a stop loss feature. Can you tell us a bit about this?
Michael Dulieu: So not only do the warrants have a strike price, but they also have a stop loss, which is triggered when the stock comes down to the particular level its been specified on the warrant. And what happens, if that price is hit, the warrant will then be knocked out and cease trading. Now once it ceases trading, you’ll find that the investment you’ll receive back will be the difference between the stop loss, and the strike price of the warrant. So you don’t lose everything, there’re still funds that’ll come back to you.
Carolyn Herbert: So does this stop loss come at a cost?

Michael Dulieu: The stop loss itself doesn’t come at a cost. However, there is a funding cost with warrants and that’s built into the price. And what you find is everyday that the warrants trade, there’s a slight adjustment to the strike price.
Carolyn Herbert: And Michael do you have any tips on which MINIs to choose and setting stop losses?
Michael Dulieu: You want to make sure you’re choosing a MINI warrant that will allow you to stay in the stock, and not be stopped out with like an intra-day movement. So choose a warrant where the stops are far enough away and allows you to stay in the trade.
Carolyn Herbert: Now back to you Martin. Could you explain to us why getting stopped out might be a problem?
Martin Woods: One of the problems with getting stopped out of a position is that you lose your underlying position in the stock, obviously. An example was we invested into CSL Limited (ASX:CSL) last year and the stock fell by about $8.00, in one morning. Now we no longer had a position in CSL and we did not participate in the upside movement of the stock, for the rest of the day.
Carolyn Herbert: What can you do to avoid this from happening?
Martin Woods: It’s important to keep an eye on other MINIs that might be available. They do have different strike prices. So if you do think you are going to get stopped out of a position, it might be wise to roll down to a lower series. It might cost you more in the short-term, but in the long run you do keep your exposure to the stock.
Carolyn Herbert: Now back to you Michael, taking a look at trading MINIs. Is trading MINIs different to say trading shares?
Michael Dulieu: Couple of differences. Firstly you have to be aware that they’re a leveraged product. So you may not be trading as many warrants as you would be in the underlying stock. Secondly liquidity, liquidity would generally typically be the same as the underlying share.
Carolyn Herbert: Final question to both of you. Do you have any tips for people watching this that may be considering using MINIs?
Martin Woods: I think with anything, it’s important to understand the product before you go into it. So start out small and then look to ramp up into your portfolio, and over time it will be an important feature to your investments.
Michael Dulieu: And be aware there’s a big universe of MINIs out there, there’s a lot of instruments you can trade. It gives you a lot of flexibility in your portfolio.
Carolyn Herbert: Martin Woods, Michael Dulieu, thank you for your insights into trading MINIs.
Martin Woods: Thank you.
Michael Dulieu: Thank you.