The strong and sustained performance of crude oil has made it the most popular commodity to trade at the moment. Not only has crude oil risen 50% in the last 5-6 months (see fig 1.1), but it has risen 780% in the last 10 years and given the current demand, this trend is set to continue. The global crude oil market continues to experience high volatility as a result of political factors, global inflation, currency movements and supply regulation and limitations.
Plenty of investors have done well from high commodity prices, especially those who jumped into the shares of energy and metal producers. Bloomberg calculates that the best-performing stocks among the Australian Stock Exchange's 100 leading companies last year werePluton Resources, a uranium company;; Zinifex, a zinc miner;and Oxiana, a gold and copper producer
Smaller companies, including pure explorers, fared even better. The stars on that list include Perilya, Summit Resources, Compass Resources and Sally Malay.
After considering the factors that impact the price of a commodity, investors have the ability to opt for a bull or bear warrant. Bull warrants make money in a rising market and bear warrants will do so in falling markets.
Similar to CFDs, warrants are leveraged so profits are magnified. With leverage of course comes greater risk; however investors are only exposed to the initial amount of the warrant
A sharp slump in many commodity prices in January — including oil, gold, copper, zinc and nickel — came as a warning, however, that the future might not always be so rosy. While demand remains strong, inventories of many commodities have been rising since mid-2006. That has eroded prices and spooked speculative investors.
But for those who have become hooked on commodities, there is now an alternative way of gaining exposure without the risk of being stuck holding weak mining-company shares. Commodity warrants, a form of derivative based on contracts traded on major global exchanges, have long been the preserve of professional traders but are now available to small investors
Commodity call and put warrants are a type of trading warrant. They are linked to the performance of a commodity such take for example light sweet crude oil. Generally, the underlying asset of a commodity warrant is a futures contact over that commodity. For example, commodity oil warrants are issued over light sweet crude oil futures contracts which are traded on NYMEX.
Currently, ASX has commodity warrants issued over oil, with the underlying asset being the light sweet crude oil futures contracts. The first three letters of the ASX six letter code is ZCL.
The main reasons for trading commodity oil warrants are that:
- They provide easy access to the oil futures market
- You can achieve a leveraged exposure to the oil futures price
- You can take a bullish or bearish view on the oil futures price by purchasing wither call or put oil warrants
- They can be easily traded on ASX trough a full service or discount/online broker
- Your risk is limited to your investment capital. You are not exposed to margin calls.
Example of an Oil Trading Warrant
Light sweet crude oil futures contract
15 February 2006
You will receive a cash payment if, at expiry on 15 February 2006, the oil futures contract is above the exercise level of US $65.00. For example, if the oil futures contract is US $70.00 at expiry you will be entitled to receive a cash payment of $0.625 per warrant. (assuming the AUD is at US $0.75)
The cash payment, also known as intrinsic value, is calculated as follows:
Intrinsic value = $70 - $65 (strike price)
Conversion ratio (8:1) = $5.00/8
It is important to recognise that when trading commodity oil warrants the value of the warrant will be based on two specific underlyings:
- price fluctuations of a specific oil futures contract in US dollars; and
- change in value between the Australian dollar and the US dollar
Commodity Warrants Australia (CWA) is a locally owned outfit that has been in business for 18 months. It sells warrants based on 12 commodities and financial markets — crude oil, gold, silver, live cattle, corn, orange juice, soy, coffee, cocoa, the Dow Jones Industrial Average, the NASDAQ Composite Index and the S&P 500 Index.
Australian based firm offering trading opportunities in global commodity and stock index markets. Commodity Warrants Australia offers investments including ...
The crude oil market is one of the most important and the one that has attracted enormous investor interest as prices soared past a record US$75 ($96) a barrel last year. Just eight years ago it was selling at around US$12 ($15).
Many factors affect oil prices — the main ones are growing demand and restricted supply. About 84 million barrels of oil are consumed daily around the world and one-quarter of that is burned in the US. A similar amount is consumed in Asia, but its population is many times larger than the US's. If economic growth in that region continues at its hectic pace, oil demand should remain strong and force prices higher.
INVESTING IN WARRANTS GUIDE
FAQ FROM CWA WHICH SORT OFGENERALLY ANSWERS ALL questions . Though conditions can differ a bit from provider to provider
- How much money do I need to get involved?
- If I hold a CWA Warrant what relationship exists with actual physical Gold?
- Commodity markets are often highly volatile. Why would I want to get involved in such a 'risky' environment?
- I've heard of the terms "margin call". How does this relate to CWA Warrants?
- Many of the finance companies I have dealt with say they value their customers when in reality they focus on the larger clients. What makes Commodity Warrants Australia different?
- Why Commodities? Why not offer warrants in shares?
- How will currency movements affect my Commodity Warrant?
- Can I see what the value of my warrant is before it matures?
- What is the difference between shares and warrants?
- Can anyone trade global commodity markets?
- Can I trade some commodities to rise in value and at the same time other commodities to fall in value?
- How long does a Warrant last?
- Can I really trade in Coffee and Orange Juice?
How much money do I need to get involved?
You can get involved for as little as a few thousand dollars.
If I hold a CWA Warrant what relationship exists with actual physical Gold?
Warrants are a derivative, which means they derive their value from the physical product. We don't trade in actually physical Gold or other commodities. We offer products that derive their value from these commodities - much like a CFD, futures or options contract.
Commodity markets are often highly volatile. Why would I want to get involved in such a 'risky' environment?
Its true many commodity markets are volatile, but there are misconceptions about what this actually means. Volatility relates to the fluctuations in prices and this is not necessarily a bad thing. All it means is that prices are moving up and down - adjusting to new information.
To the astute investor this volatility represents opportunity. All our Warrants have limited risk and unlimited profit potential. With this in mind, our products actually benefit from market volatility.
I've heard of the terms "margin call". How does this relate to CWA Warrants?
A Margin Call is usually associated with futures market. It is the requirement for an investor to meet the minimum credit level.
Like Warrants, a futures contract is leveraged. However unlike Warrants, you can lose more than your initial investment in a futures contract. When this occurs, the investor receives a "margin call". This is a requirement to add more money to their trading account.
For example, you may invest $10,000 is futures trading and go on to lose $30,000. When this happens you would receive a margin call for the additional $20,000.
Having such large exposures is not appealing to most retail investors. CWA Warrants are structured so that your only risk is your initial investment. There are no margins calls.
Many of the finance companies I have dealt with say they value their customers when in reality they focus on the larger clients. What makes Commodity Warrants Australia different?
Commodity Warrants Australia is different in that our team of experienced professionals is focused on retail clients, so you don't compete for attention with large (or institutional) investors.
Why Commodities? Why not offer warrant in share?
Many investors are aware of the importance of diversification and how it is used to reduce risk exposure. For many people the extent of their diversification is about selecting a few stocks from a variety of different areas, but if you think about it your investments are still on the same market (stocks) and as such are affected by the same underlying factors (stock market risk).
Commodities offer a new degree of diversification and trading opportunity. Simple!
How will currency movements affect my Commodity Warrant?
Most CWA Warrants are denominated in US Dollars so investors are exposed to fluctuations of foreign exchange markets. The level of exposure is limited to the size of the warrant position.
Can I see what the value of my warrant is before it matures?
The value of Warrant prior to maturity is published daily on our website (the member's only section). A Warrant can be closed any time before expiry.
What is the difference between shares and warrants?
A share represents part ownership of a corporation.
A Warrant is an investment product that gives the investor price exposure to an asset (e.g. a commodity) without having to deal with the physical asset itself.
Can anyone trade global commodity markets?
Traditionally there have been two broad groups involved in commodity market trading; Physical users (generally called commercials or hedgers) and speculators (generally large fund managers and professional traders).
As technology spreads and information becomes more widely distributed there has been a substantial increase in both the number and types of people involved in global commodity markets. CWA provides the means for retail investors to trade in these markets.
Can I trade some commodities to rise in value and at the same time other commodities to fall in value?
Yes you can. CWA offer Warrants that can make money in a rising (Bull Warrants) or a falling market (Bear Warrant).
How long does a Warrant last?
Generally speaking a Warrants life span ranges from 3 - 6 months.
Can I really trade in Coffee and Orange Juice?
Coffee and Orange Juice are two of the most heavily traded global agricultural commodities. Warrants allow an investor to get involved in these markets for a relatively small sum.
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