6. Implied Volatility of warrants

  • Implied volatility is the market's expectation of the future volatility of an underlying asset. When the market expects the underlying asset's future price volatility to decrease (a lower probability for the warrant to become in-the-money), the warrant's implied volatility declines. When the market expects a greater fluctuation in the underlying asset's future price (a higher probability for the warrant to become in-the-money), the warrant's implied volatility rises (see bottom-left chart).
  • Assuming other factors remain unchanged, an increase of implied volatility indicates greater price fluctuation of the underlying asset, meaning a higher probability of the warrants becoming in-the-money. This will lead to an increase in theoretic price of a warrant (see chart at bottom right), and vice versa. Hence, implied volatility is commonly used as a measurement to compare the expensiveness of a standard warrant with products of similar terms.

The above is a hypothetical case of warrants for the purpose of illustration only. Past performance is not indicative of future results. The price of the structured products may fall in value as rapidly as it may rise and investors may sustain a total loss of their principal invested.


*Turnover of a warrant or CBBC has no direct relationship with the product's price. Investors should not use turnover as the only indicator when choosing a warrant or CBBC.