Options & Warrants
Options
Options trading is a contract between two parties providing the taker (buyer) with the right, though not the obligation, to buy or sell a specific parcel of shares at a predetermined price on or before a specified date. On the ASX, two main types of options are traded: call options, granting the right to buy underlying shares, and put options, providing the right to sell underlying shares.
With options trading, you have the flexibility to navigate the market movements and capitalise on opportunities, as you can trade options over most ASX-listed companies.
Advantages of options trading
Options trading offers several advantages, including effective risk management, using put options to hedge against potential share value declines. The flexibility of time to decide, provided by call and put options, allows holders to make informed choices before the option's expiry date. The ease of trading in and out of option positions enables investors to capitalise on market expectations without intending to exercise them. Leverage, though involving higher risk, allows for a higher return with a smaller initial investment, while the options market on the ASX facilitates portfolio diversification at a comparable or lower initial cost than direct share purchases. Additionally, options trading presents income generation opportunities, where shareholders can earn extra income by writing call options against their shares through a 'covered write' strategy.
Disadvantages of options trading
Options trading comes with inherent disadvantages that may not suit everyone due to the elevated risk level. Time value erosion can negatively impact the price of purchased options, even if the underlying instrument moves favourably. The use of options as a leveraging tool can magnify losses, leading to rapid and significant financial downturns. Additionally, options have a finite life, necessitating close monitoring, frequent observation, and ongoing maintenance, making them a more demanding investment instrument. Investors should carefully consider these factors and assess their risk tolerance before engaging in options trading.
Warrants
Warrants, a form of derivative traded on the ASX and Chi-X, offer investors a unique opportunity to trade underlying instruments like shares without direct ownership. Issued by banks, governments, or financial institutions, warrants come in various types, such as Self-Funding Instalments, trading warrants, Mini Warrants (MINIs), barrier warrants, commodity warrants, currency warrants, structured investment products, and endowment warrants. Each warrant type may carry a different risk/return profile. Call warrants capitalise on upward price movements in the underlying instrument, while put warrants benefit from a downward trend.
Advantages of warrants
Warrants, particularly instalments, offer investors the advantages of share ownership, allowing participation in capital movements and the receipt of dividends and franking credits. Instalment warrants function as a loan for purchasing shares, with no obligation to repay the loan immediately. Investors only need to make an initial payment, and the final payment is optional, payable at a later date. This mechanism provides flexibility and allows investors, including members of Self-Managed Superannuation Funds (SMSFs), to legally gear their funds for potential financial benefits.
Disadvantages of warrants
Warrants come with inherent disadvantages, as certain features can make them riskier than others. Time value erosion may impact the warrant price negatively, even when the underlying instrument moves favourably. For a comprehensive understanding of the risks and features associated with specific warrants, it is advisable to contact us and seek personalised advice. Investors should carefully assess these factors and consider individual risk tolerance before engaging in warrant trading.
News & insights
The Wall Street Journal of 21 August 2025 carried an article which noted that Ether, a cryptocurrency long overshadowed by Bitcoin has surged in price in August.
The article noted that unlike Bitcoin, there was not a hard cap on Ether supply, but the digital token is increasingly used for transactions on Ethereum , a platform where developers build and operate applications that can be used to trade, lend and borrow digital currencies.
This is important because of the passage on 18 July 2025 of the GENIUS act which creates the first regulatory framework for Stablecoins. Stablecoins are US Dollar pegged digital tokens. The Act requires that Stablecoins , are to be to be fully backed by US Treasury Instruments or other US dollar assets .
The idea is that if Ethereum becomes part of the infrastructure of Stablecoins , Ether would then benefit from increased activity on the Ethereum platform.
Tokenized money market funds from Blackrock and other institutions already operate on the Ethereum network.
The Wall Street journal article goes on to note that activity on the Ethereum platform has already amounted to more than $US1.2 trillion this year ,compared with $960 million to the same period last year.
So today ,we thought it might be a good idea to try and work out what makes Bitcoin and Ether go up and down.
As Nobel Prize winning economist Paul Krugman once said " Economists don't care if a Model works in practice ,as long as it works in theory" . Our theoretical model might be thought as a "Margin Lending Model" . In such a model variations in Bitcoin are a function of variation in the value of the US stock market .
As the US stock market rises, then the amount of cash at margin available to buy Bitcoin also rises .
The reverse occurs when the US stock market goes down .
Our model of Bitcoin based on this theory is shown in Figure 1 . We are surprised that this simple model explains 88% of monthly variation in Bitcoin since the beginning of 2019.
At the end of August our model told us that when Bitcoin was then valued at $US112,491 , that it was then overvalued by $US15,785 per token.
Modeling Ether is not so simple . Ether is a token but Ethereum is a business. this makes the price of Either sensitive to variations in conditions in the US Corporate Debt Market.
Taking that into account as well as stock market strength, gives us a model for Ether which is shown in figure 2.
This model explains 70.1% of monthly variation since the beginning of 2019. Our model tells us that at the end of August, Ether at $US 4,378per token was $US 560 above our model estimate of $US3,818.00 . Ether is moderately overvalued.
So neither Bitcoin nor Ether are cheap right now.
ETFs for each of Bitcoin and Ether are now available from your friendly local stockbroker .
But right now , our models tell us that neither of them is cheap!
There is more to what happened at Jackson Hole than just the speech by Jay Powell.
In my talk last week ,I said that our model of the Fed funds rate stood at 3.65%. This is actually 70 basis points lower than the actual level of 4.35%.
I also said that the Fed was successfully achieving a "soft landing" with employment growing at 1%. This was below the median level of employment growth since 2004 of 1.6%.
Still , as I listened to Jay Powell Speak , I noted a sense of concern in his voice when he said that "The July employment report released earlier this month slowed to an average pace of only 35,000 average per month over the past three months, down from 168,000 per month during 2024. This slowdown is much larger than assessed just a month ago."
My interpretation of this is that Chair Powell may be concerned that the "soft landing " achieved by the Fed may be in danger of turning into a "hard landing". This suggested a rate cut of 25 basis points by the Fed at the next meeting on 17-18 September.
This would leave the Fed Funds rate at 4.1%. This would mean that the Fed Funds rate would still be 45 basis points higher than our model estimate of 3.65%. Hence the Fed Funds rate would remain "modestly restrictive."
Dire Demography?
Jackson Hole was actually a Fed Strategy meeting with many speakers in addition to Jay Powell.
Two speakers who followed on the afternoon of his speech were Claudia Goldin, Professor at Harvard
and Chad Janis of Stanford Graduate Business School. They each gave foreboding presentations on the demography of developed economies.
Claudia Goldin spoke on "The Downside of Fertility". She noted that birth rates in the Developed World are now generally below replacement level. The Total Fertility rate is below 2 in France , the US and the UK.
It is dangerously low below 1.5 in Italy and Spain and below 1 in Korea. She observes that the age of first marriage of couples in the US is now 7 years later than it was in the 1960's. This reduces their child bearing years.
This paper was then followed by a discussion of it by Chad Janis of Stanford Graduate Business School. He noted that there is a profound difference between a future with a replacement rate of 2.2 kids per family , which he called the "Expanding Cosmos" with
• Growing population leading to a growing number of researchers, leading to rising living standards and Exponential growth in both living standards and population AND a replacement level of 1.9 kids per family which leads to
• Negative population growth , which he called "an Empty Planet " and the end of humanity
as numbers of researchers declines and economic growth ceases.
Of course this seems all very serious indeed . Perhaps what this really means ,is that if we want to save the world , we should just relax and start having a lot more fun!!
Today, we’re diving into how the Reserve Bank of Australia (RBA) sets interest rates as it nears its target of 2.5% inflation, and what happens when that target is reached. Back in 1898, Swedish economist Knut Wicksell published *Money, Interest and Commodity Prices*, introducing the concept of the natural rate of interest. This is the real interest rate that maintains price stability. Unlike Wicksell’s time, modern central banks, including the RBA, focus on stabilising the rate of inflation rather than the price level itself.
In Australia, the RBA aims to keep inflation at 2.5%. To achieve this, it sets a real interest rate, known as the neutral rate, which can only be determined in practice by observing what rate stabilises inflation at 2.5%. Looking at data from January 2000, we see significant fluctuations in Australia’s real cash rate, but over the long term, the average real rate has been 0.85%. This suggests that the RBA can maintain its 2.5% inflation target with an average real cash rate of 0.85%. This is a valuable insight as the RBA approaches this target.
As inflation nears 2.5%, we can estimate that the cash rate will settle at 2.5% (the inflation target) plus the long-term real rate of 0.85%, resulting in a cash rate of 3.35%. At the RBA meeting on Tuesday, 12 August, when the trimmed mean inflation rate for June had already dropped to 2.7%, the RBA reduced the real cash rate to 0.9%, resulting in a cash rate of 3.6%.
We anticipate that when the trimmed mean inflation for September falls to 2.5%, as expected, the cash rate will adjust to 2.5% plus the long-term real rate of 0.85%, bringing it to 3.35%. The September quarter trimmed mean will be published at the end of October, just before the RBA’s November meeting. We expect the RBA to hold the cash rate steady at its September meeting, but when it meets in November, with the trimmed mean likely at 2.5%, the cash rate is projected to fall to 3.35%.
