Margin Loans Using Warrants to avoid Margin Calls

Could someone please explain this? From what I hear it's what the gurus (Steve Navra, Peter Spann) are suggesting. But how does it work?

 

About Instalment Warrants
Instalments - not as challenging as you once thought. Australian Securities Exchange.
ASX - Adviser Services Update Using warrants in a Self Managed Super Fund
Instalment warrants - Investment - smh.com.au

 

So if you buy a warrant with a two year expiry and you have to make the repayments/installments or finance the loan, what happens if the market continues to fall? When expiry date arrives the warrant is worth less than you bought it for and you still have some owing, but you dont have to take delivery, thereby I guess locking in a loss. Where do you get the income as per Navra formula other than the dividends attaching to that particular stock?

 

I would say that if you cannot trade shares successfully do not play with lady luck trading warrants (please correct me if I am wrong).
Normal market risks apply in warrant trading as well. Warrants are not a magic bullet, and they will not guarantee you a profit.
If you make wrong decision with warrants you’ll lose money just as you would trading shares or options.
If instalment warrants are indeed ‘magic tool’ everybody should play with it - me think.

 

I think the advisors were suggesting the limited recourse nature for longer term investors is better than a margin loan.

You are on the register all the time and get the distributions. But if ownership is non-economical you can walk away and lose only those shares.

Any premium for the limited recourse is a capital expense.

Trading in warrants is different.

Cheers,

Rob

 

Ok. So say I want to buy and hold a particular stock for a long time (10+ years). My goal here would be to buy a large portion of the stock now, then use my (salary/wage) income over the next 10 years to buy even more. So I'm risk tolerant in regards to volatility of the actual stock price - however I'd want to avoid margin call situations.

The options I see are:

- Buy some shares now. Save and buy more at regular intervals.

- Buy some shares now, get a ML and then buy more. Save for regular intervales. Then every (say) 6 months, buy another lot of the same shares and drawdown the loan to a desired LVR.

- Use instalment warrants somehow... still not 100% on their operation.

- Do something else entirely?

 

Options include:

Small accumulations over time - spreads risk and profit, reduces debt requirements

Borrow and buy big - secured over property or margined (risky)

Borrow and buy big now - limited recourse loan or put options (less risk)

Instalment warrants are instalment purchases where you only stand to lose the underlying security. In the meantime you have access to the distributions to pay the instalments.

Downside: the limited recourse feature is non-deductible, but it forms part of the cost base.

Cheers,

Rob

 

Thanks Tropo.