This refers to the ratio of the price of a covered warrant relative to its time to expiry. A covered warrant is referred to as a wasted asset, which means its value deteriorates over time. For example, a covered warrant entitles the holder to purchase stock at a specified price (strike price) on a future date. Investors usually buy these types of warrants if they think the price of a stock will rise in the future. If this happens then they can purchase the stock at the strike price, which will be below the spot price of the stock at expiry. If, before the expiry date, the covered warrant looks like it will be in-the-money – the stock price has risen above the warrant’s strike price – then the time decay will be more rapid since there is more time for the stock price to fall and the covered warrant to lose value. This also works vice-versa, so if, nearing expiry the covered warrant is not in-the-money then time decay slows down since the more time to expiry the better as the stock price could move in your favour. A covered warrant is less at risk from time decay than other types of warrants because investors’ downside risk on these products is limited.
RELATIVE STRENGTH INDEX
The Relative Strength Index (RSI) is a technical momentum indicator that compares the number of recent gains to the number of recent losses in an asset’s price in order to tell if it is either overbought or oversold. To calculate this index you need to first choose a specific time period, say 30 days. Next, you need to divide the average of 30 days’ up-closes with the average of 30 days’ down-closes. The RSI ranges from zero to 100. An asset is deemed to be overbought once it has an RSI of 70 or above. In the same way, if the asset has an RSI of 30 or lower then the asset is deemed to be oversold. Large swings in prices can distort the index, so some technical traders try to smooth the data before using it to calculate an RSI. Traders use the index to try and spot swings in an asset’s price. But there are limitations to how reliable the RSI is in predicting market performance. For example, it can indicate that an asset is overbought and therefore should fall in price, but in actual fact, assets can look overbought for a very long time.