Just trying to get a feel for some of this warrant stuff, and as an example, am looking at three put warrants on ZFX, as shown below:

ZFX last closed at $9.62. The above information came from the OZWarrants website.

I haven't received my books on options yet (and no, I haven't worked my way through all those formula in Cox & Rubinstein!), but have a few questions about some of the figures here. I know they've just come from the Black-Scholes formula, but I'm trying to get some feel for how they relate to the actual market situation for ZFX.

So, here are some comments based on what I understand so far, and some questions. Please correct me where I'm wrong (which will likely be nearly everywhere ).

1. All three warrants are ITM, WOR the most and WOS the least (easy bits first!).

2. WOP has a conversion factor of 3 compared to 4 for the other two. Does this matter if there's no intention of exercising the warrant? I gather though that the warrant price should be multiplied by the conversion factor to get a price that can be more directly compared to the underlying price (eg. WOP would be $1.20 per $9.62 underlying share).

3. Since WOP has a delta of -1, the effective gearing is just -9.62/1.20 = -8.02. Similarly, WOR has a per-share price of $3.08 and an effective gearing of -(9.62/3.08)*0.53 = 1.66.

So far so good, I think. Now, the trickier bits:

4. The main parameters of price, delta, time decay, and implied volatility, are all related by the Black-Scholes formula. But what logically determines the value of each parameter? They're presumably not all just plucked out of thin air to come up with some arbitrary price based on the formula. So:

4a) WOP has an IV of zero while WOR has an IV of 110.8. Since they're both based on the same underlying, and are both significantly ITM, why would their IVs be so different? WOP is about a month closer to expiry, but then WOR is deeper ITM. What is the warrant IV value telling us about the volatility of the underlying share?

4b) WOR and WOS both have the same expiry date, but WOS has a higher time decay factor, meaning it's value decreases faster with time. Is that primarily because it's much less ITM?

4c) What mainly determines the delta? WOS and WOR have the same expiry dates and very similar deltas yet one is quite a bit deeper ITM than the other. And WOP's delta is -1. Is that primarily because it's well ITM with only 45 days till expiry?

4d) Also not quite sure why OZWarrants would rate WOP low risk when it has by far the highest effective gearing.

Okay, that's enough for the moment. I can see how these figures can be used with the formula to calculate a price, or including price to come up with an IV, but I'm just trying to get an idea of what determines the value of those other parameters in the first place.

And as a practical application, if you thought ZFX was going to drop again tomorrow and wanted to use one of these put warrants to capture the move, what factors would you consider in determining which one would be the best to use?

All comments welcome

Cheers,

GP

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