- What information does the notification of the issuance of subordinated sales warrants include?
- How to apply secondary sales option in the capital market?
- What are the rules related to subordinated sales warrants in the stock market?
A subordinated put option is an instrument issued by the issuer of the underlying stock (companies) and gives the holder the option to purchase the underlying asset (the underlying stock) included in the contract at a specified time (maturity date) and at a specified price (exercise price). ) to sell.
What is the purpose of issuing subordinated sales warrants?
Secondary sales warrants are offered by companies in order to reduce the risk of investment in the market and create confidence in shareholders. In fact, by issuing these bonds, companies guarantee the value of their shares and give the assurance to the shareholders that their interests will be preserved even if the share price decreases. These bonds are considered as a kind of stock insurance.
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What information does the notification of the issuance of subordinated sales warrants include?
This announcement is published at least one working day before the launch and includes the following information:
Basic asset or share
It is the share on which the subordinated sales warrants are set.
It is a company that issues subordinated sales warrants.
The interval between the first and the last trading day of the secondary put option is called.
Application date (due date)
The date set for the sale of warrants is called secondary sale.
It is the fixed price for the underlying stock that is paid to the stockholder by the issuer of the bond on the exercise date.
Total supply volume
The total number of secondary put options that will be offered until the end of the trading period.
The maximum number of secondary put options that any natural or legal person can purchase with their trading code.
It is the price at which secondary put option bonds are sold by the supplier, and it is determined by a special formula every day, and therefore, it is not fixed.
How to apply secondary sales option?
It is possible to exercise subordinated sales warrants only on the maturity date (the exercise date). It should be noted that if the request is registered in the brokerage panel, it will not be possible to cancel the request.
To register an application, pay attention to the following points:
1. Registration of the settlement request must be done by 14:00 on the working day before the due date.
2. Only secondary put options can be exercised by shareholders whose basic shares are kept in the asset portfolio until the end of the maturity date.
3. Registration of the settlement request is possible only by the broker in charge of subordinated sales warrants. The broker overseeing the secondary put option is the same as the broker overseeing the underlying stock. If your base stock does not have a supervising broker, you must determine it.
4. If you intend to apply the bonds, it will not be possible for you to change the supervising broker from one week before the maturity date.
5. If you do not register the exercise request by the due date, the subordinated sales warrants will expire and will no longer be able to be exercised.
6. If the number of put option bonds is greater than the number of basic shares or purchase limit for each trading code, the excess number will not be applicable.
7. It is better to register the settlement request for secondary put options when the closing price of the underlying stock at the time of maturity is lower than the exercise price.
At what price should we buy warrants?
As we mentioned, the subordinated sale option bonds are considered as a kind of stock insurance and it gives the shareholder the assurance that the value of his shares will be maintained. But you should pay attention to the fact that the purchase of these bonds will lead to profits for the shareholders when the market trend is downward from the time of purchase of these bonds to the maturity date. In fact, if the closing price of the share on the maturity date is lower than the exercise price, it will lead to profit for the shareholder.
Of course, the cost of purchasing bonds should also be calculated and by deducting from the resulting profit (which is obtained from the difference between the closing price of the share and the exercise price on the maturity date), the shareholder’s net profit should be calculated. Therefore, due to the one-sidedness of the stock market in Iran, it can be said that in downward trends, buying these bonds can help the shareholder’s profitability. In fact, these bonds should be purchased at a price that, taking into account the market trend until the maturity date, the difference between the basic stock price and the exercise price, will lead to the profit of the shareholder.
If on the maturity date, the closing price of the share is higher than the exercise price, the shareholder can sell his shares at the daily price in the market and thereby earn a profit. In this case, the bonds are automatically invalidated and the shareholder will suffer only as much as the cost he paid for the purchase of the secondary sale option bonds. In the following, we will explain in detail the appropriate price of subordinated bonds and the efficiency of buying these bonds.
In what ways is settlement of subordinated sales warrants done?
The settlement of secondary sale warrants is done in two ways: cash settlement and physical settlement.
Cash settlement of secondary put options is possible only if the closing price of the share on the maturity date is lower than the exercise price. In this type of settlement, the difference between the closing share price and the exercise price on the due date will be paid to the shareholder in cash by the supplying company. It should be noted that in this type of settlement, shares are not transferred from the shareholder to the supplier company and the basic shares will remain in the shareholder’s portfolio.
In physical settlement, the issuer of the bonds must buy the individual’s basic shares from him at the exercise price on the maturity date. In this type of settlement, we see the transfer of shares from the shareholder’s portfolio to the supplier company. In fact, the basic shares are purchased by the supplier at the applied price and the resulting amount will be deposited into the shareholder’s account.
Benefits of subordinated put options
- The use of these bonds reduces the investment risk and preserves the value of the basic shares.
- If under the influence of negative emotions of the market, the value of the basic shares decreases, the secondary put option bonds create safe conditions in order to protect the interests of the shareholders.
- Subordinated sales warrants provide reassurance to shareholders and, as a result, increase the demand for the purchase of company shares.
- For shareholders who have purchased subordinated put options, a minimum return of 20% is guaranteed by the major shareholder.
Disadvantages of secondary sales options
- No secondary market
- The requirement for the shareholder to own the basic shares in order to purchase subordinated put option bonds
- Determining the purchase limit of subordinated sales options for shareholders
- Termination of the obligations of the issuer of subordinated sales warrants after the date of application
- The possibility of creating positive emotions to increase the share price before the effective date
Rules related to subordinated sales warrants
- Secondary sales warrants can only be sold on the maturity date and at the exercise price; This means that these bonds do not have a secondary market.
- Only those who are shareholders of the company offering these bonds can buy the secondary put option bonds.
- It is possible to buy secondary put option bonds only according to the number of shares in the shareholder’s portfolio. If these bonds are purchased more than the number of stocks in the portfolio, the excess bonds will be canceled and no amount will be returned to your account.
- Retention of underlying shares equal to the number of subordinated put options purchased up to the exercise date is required. If you sell a number of shares in your portfolio before the effective date, the surplus of bonds will be void.
- If you do not register your application with the relevant broker by the due date, the subordinated sales warrants will be invalidated.
- If on the maturity date, the underlying stock price is greater than or equal to the exercise price, your bonds will be void.
- If the supplier does not fulfill his obligations to the shareholder after the application, he will be fined by the stock exchange organization.
- After registering the application to the supervising agency, it is not possible to cancel or edit the application.
List of symbols with secondary papers
Usually, the symbol of put option bonds is composed of the letter “H” and a part of the stock exchange symbol along with the maturity date. To see the complete list of symbols with secondary bonds in the stock market and over-the-counter market, enter this link:
List of symbols with secondary sales warrants
As you can see in the image below, the symbols related to the secondary put options will be visible on this page based on the last trading day or any time.
Where can we get the information about the subordinated documents of the companies?
To get information about companies that have issued subordinated bonds, refer to the website of the Tehran Stock Exchange. This information includes the symbol of the subordinated bonds, the supplier company, the price of the transaction, the purchase limit of the real and legal trading code, the date of the transaction, and the start and end dates of the trading period. In addition to the mentioned items, this site also provides you with all the information related to supply and demand and the biggest price increase and decrease.
How to calculate the return on the purchase of secondary sales options
As we have mentioned, the cost of buying secondary put option bonds should be such that it leads to the shareholder’s profit. In order to achieve this goal, it is enough to calculate the yield of buying these bonds according to the following formula:
Paid/(paid – received) = return
The price of applying the subordinated bonds at the time of maturity × the number of subordinated bonds purchased = received
The cost of buying secondary bonds + the cost of buying basic shares = payment
To better understand this article, consider the following example:
Suppose a person wants to buy 1000 warrants at the price of 22 Tomans. Therefore, he should buy 1000 shares of company A’s stock. If the price of each share is 320 Tomans, his payment is equal to:
( 22×1000) + (320×1000) = payment
343368 Tomans = 20088 + 321280 = payment
Let’s assume that the bond price is 340 Tomans. In this case, the amount received is equal to:
340,000 Tomans = (1000 x 340) = received
The bond yield for this person is equal to:
343368/ (340000-343368) = -0.009
Therefore, buying subordinated bonds at this price is not profitable for a person and will also cause losses. Now suppose that the desired return of the person is 5%. By putting this value in the above formula, the amount received, the cost paid, and as a result, the price of the desired subordinated bonds is obtained.
Paid / (paid – 340000) = 5%
323809 Tomans = payment
2529 Tomans = the cost of buying secondary bonds
Therefore, in order to obtain a 5% yield, a person must buy each sheet of subordinated bonds for the amount of 2.5 rials.
Frequently asked questions about secondary sales warrants
- Is it possible to sell secondary put options during the trading period?
no These bonds can only be sold on the due date and if they are not used on the due date, they will be automatically voided.
- Will the number and price of subordinated bonds change after the capital increase?
Yes. The number and price of subordinated bonds will change accordingly with any adjustment in the stock price.
- How many secondary sales warrants can be purchased by any natural or legal person?
In every notice issued by the supplier, the authorized number of subordinated bonds for each user is mentioned.
- What are the factors affecting the price of secondary sales options?
In general, the higher the probability that the underlying asset will decline, the higher the price of the underlying put option will be.
- If the number of bonds purchased exceeds the number of stocks in one’s portfolio, what happens to the excess number?
This number has no surplus credit and cannot be sold.
Secondary sales warrants are among the tools used by the stock exchange organization in order to reduce investment risk, protect the interests of shareholders and create enthusiasm for investing in this market. In fact, these bonds will guarantee the value of your shares if the share price falls. Of course, before buying these bonds, you should familiarize yourself with all the rules governing them and make sure that you buy these bonds at the right price and that using them will lead to your profitability.