ALEXANDRE HOUPERT<br /><strong>HEAD OF LISTED PRODUCTS UK, SG CORPORATE & INVESTMENT BANKING</strong><br /><br />LIKE all investors, those who use covered warrants will be starting to think about how to position themselves for a potential global upturn.<br /><br />Two sectors in particular have been at the forefront of the market's summer rally: banking and mining. Given how low banking stocks fell during the financial crisis, it is probably not surprising that they have rebounded strongly during the recovery. There has been a lot of interest in call covered warrants on Lloyds Banking Group and Royal Bank of Scotland. Lloyds has rallied strongly in the past few months, and the call warrants have reflected this, with, for instance, the price of the December 2010 call warrant with a strike of £1.20 rising 93 per cent in the past month.<br /><br />Mining stocks are highly correlated with consumer demand and the health of the world economy. China is a major importer of raw materials, and investor perception of the country will influence the performance of call covered warrants on mining stocks such as Rio Tinto and Xstrata. In general, investors have been showing more confidence about the solidity of Chinese manufacturing. Mining stocks have also benefited from the revival of possible M&A. Using covered warrants investors have been able to leverage the performance of Rio Tinto, with, for instance, the price of the March 2010 call warrant, strike £18.17, rising 73 per cent since the beginning of July compared to 26 percent for the share itself.<br /><br />Investors looking at covered warrants on banking and mining stocks could consider warrants with six months to one year until maturity. This would give the underlying asset time to move in line with your view, be it bullish or bearish, but will ensure that you do not suffer too much from the deterioration in time value, which occurs as the covered warrant approaches maturity. You should also look for medium-risk covered warrants – ideally with a delta of about 40 per cent, which means that the price of the covered warrant is really responding to the movement in the underlying.