There are two methods to buy Covered Warrants (CWs):

- Method 1: You can register to buy CWs at the time the issuers offer them on the primary market (immediately after receiving approval from the Vietnam Securities Commission for the offering).

- Method 2: You can buy CWs on the secondary market (after they are listed on the Stock Exchanges).

When trading listed Covered Warrants (CWs) on the Stock Exchanges, you can use your regular stock trading account to buy/sell CWs. The trading hours, matching method, order types, price determination principles and trading units are similar to those for stocks. However, there are some specific rules that differ from stock trading such as:

- Quoted price unit: VND10 for all CW price level

- Ceiling/floor price of CW in the trading day: Based on the price fluctuation range of the underlying securities, determined by the formula: Ceiling/Floor price of CW = Reference Price of CW ± Price Fluctuation Range of the Underlying Securities/Conversion Ratio.

If you hold CW with an underlying asset that is a stock, you do not have any rights regarding the company, unlike the shareholders of that stock. As a CW holder, you will not have: Voting rights, the right to receive dividends, the right to buy additional shares and the right to receive bonus shares related to the company that issues the underlying stock. All corporate events related to the underlying stock of the CW (if any) will result in adjustments to the exercise price and conversion ratio of the CW.

A Covered Warrant (CW) in circulation has different types of prices, each with its own meaning, so you need to distinguish between these prices in a CW:
- CW price (price of the Covered warrant) is the cost you must pay if you want to own the CW. At the time of issuance, the CW price is the offering price set by the issuer. When the CW is listed and traded on the Stock Exchanges, the CW price refers to the market price at which the CW is traded.   
- Exercise price (price of exercising the rights): is the price at which you, as a holder of the covered warrant (CW), have the right to buy or sell the underlying asset from the issuer of the CW when the CW mature. This price is the basis for comparing and determining the profit or loss status when investing in the CW. The exercise price is disclosed by the issuer at the time of the CW offering. In general, the exercise price remains fixed throughout the duration of the CW and is only adjusted in certain cases such as corporate events related to the underlying asset.
- Settlement price: is the price determined and announced by the Stock Exchanges before the expiration date of the Covered Warrants (CWs). The difference between the settlement price and the exercise price indicates your profit or loss at the time of CW expiration. This difference serves as the basis for the issuer to pay the cash settlement when you exercise your right. The settlement price of a CW upon exercise is the average closing price of the underlying asset over the five (05) trading days immediately preceding the expiration date, excluding the expiration (Regulations of Securities Trading on Ho Chi Minh City Stock Exchange).

During the period of Covered Warrants (CWs), you can realize profits or cut losses by buying or selling CWs on the Stock Exchanges.
Alternatively, on the expiration date, if you hold CWs that are in a profitable position, you have the right to exercise the CW and receive a cash payment equal to the difference between the settlement price and the exercise price. The payment will be completed within five (05) working days from the day you place the exercise order or from the expiration date.
If you do not place an exercise order for CWs in a profitable position, the issuer will still pay the cash difference to you for those CWs.

Example:
You buy 1,000 covered warrants of VNM stock with the following details:
- Conversion ratio: 5:1
- Exercise price: VND150,000
- Current price of VNM stock: VND145,000
- Duration of warrants: 6 months
- Price per warrant: VND1,000
The total investment in the CW = 1,000 CW * 1,000 = VND1,000,000

This is the amount you spend to buy the 1,000 CWs.
- After three months, assuming the VNM stock price in the market is VND155,000 and the market price for one CW is VND1,500. You can realize a profit by selling the CW on the Stock Exchanges.

Your profit = 1,000 CWs * (1,500 - 1,000) = VND500,000.

So, you would earn a profit of VND500,000 by selling the 1,000 CWs
- On maturity date:
Assuming you hold the CW until the expiration date and the settlement price for VNM stock is calculated and announced as VND165,000.
The issuer will pay you the amount: (1,000/5) * (165,000 – 150,000) = VND3,000,000
Your profit will be = 3,000,000 - 1,000,000 (total initial investment to buy CWs) = VND2,000,000

However, if the settlement price for VNM stock is calculated and announced as less than or equal to VND150,000 (the exercise price), the difference between the settlement price and the exercise price will be ≤ VND0. In this case, the CW will not be exercised and you will lose your initial investment of VND1,000,000.

The market price of the Covered Warrants (CWs) will not be adjusted when the underlying stock has corporate events (dividends or additional share issuance). However, the exercise price and the conversion ratio of the CW will be adjusted. The method of adjustment and the regulation to disclose information about the adjustment will be specified in the prospectus of the issuing organization.
Formula for adjusting exercise price and conversion ratio:
- New exercise price = Old exercise price * (Adjusted reference price of underlying stocks on exercise right date/Unadjusted reference price of underlying stock on exercise right date)
- New conversion ratio = Old conversion ratio * (Adjusted reference price of underlying stocks on exercise right date/Unadjusted reference price of underlying stock on exercise right date).

These adjustments ensure that the value of the Covered Warrants (CWs) remains fair and reflective of corporate actions, preventing dilution or unfair advantages to CW holders.

The conversion ratio indicates the number of Covered Warrants (CWs) you need to exchange for one unit of the underlying stock.

Example:
A conversion ratio of 10:1 means you need to hold 10 CWs to buy one share of the underlying stocks.

Leverage effect: CW is a financial investment tool that can enhance profits but also increase possible losses if the underlying stock moves contrary to your expectations.

Limited lifespan: Unlike underlying stocks, CWs have a finite lifespan. At expiration, you can not continue holding the CW as with stocks. Instead, you will either receive a cash settlement or lose the initial buy cost of the CW.

Time: Some factors contributing to the value of a Covered Warrant (CW) depreciate over time, causing the CW's price to decline. Therefore, CWs are not suitable for long-term holding. Some factors contributing to the value of a Covered Warrant (CW) depreciate over time, causing the CW's price to decline. Therefore, CWs are not suitable for long-term holding.
Example: Volatility is a key factor influencing the value of CWs. Longer time to expiration increases the chance of price fluctuations in the underlying asset, raising the CW’s price. On the contrary, when expiration approaches, the possibility of price movement decreases, leading to lower CW prices.

Market supply and demand: Like any other commodity, the price of a CW is influenced by market supply and demand dynamics.

Volatility of underlying stocks: The price of a CW is directly affected by the price fluctuations of the underlying stocks. Increased volatility in the underlying stock raises the CW’s value, while decreased volatility lowers it.

Issuer: CW represents a contract between the issuer and the holder. The issuer is obligated to pay or deliver the underlying stock when the holder exercises the CW. If the issuer faces insolvency or bankruptcy during the duration of the CW, it can pose a significant risk to CW holders, potentially resulting in losses.

How are covered warrants traded on the stock exchange?

Covered Warrant (CW) transactions are subject to personal income tax (PIT)

According to Notification No. 1468/BTC-CST issued by the Ministry of Finance regarding tax policies for CW transactions, personal income tax (PIT) is applied at different stages of CW trading:

• Before expiration date: PIT = (Execution price of CW * Number of CWs) * 0.1%
• On expiration date: PIT = (Settlemet price of underlying stock * Number of CWs/Conversion ratio) * 0.1%

Example:

You buy 1,000 buying CWs of HPG stock with the following details:

Therefore, the total investment in the CW = 1,000 CWs * 1,000 = VND1,000,000

• Case 1: After six months, selling CW

Market price per CW: VND1,200. You can take profits by selling CWs immediately on the Stock Exchanges at this point.

Profit/Loss = 1,000 * (1,200 – 1,000) = VND200,000

PIT = 1,200 * 1.000 * 0.1% = VND1,200

Net Profit after tax = 200,000 – 1,200 = VND198,800

• Case 2: A customer holds CW until the expiration date

Assume that on the expiration date, the settlement price for HPG shares is calculated and announced at VND35,200 (greater than the exercise price). The CW will be exercised and the issuer will pay you accordingly.

Settlement price = 1,000/5 * (35,200 – 30,000) = VND1,040,000

PIT = 35,200 * 1,000/5 * 0.1% = VND70,400

Profit/Loss = Payment amount – Amount spent to buy the CW = 1,040,000 – 1,000,000 = VND40,000

Profit after tax = 40,000 – 70,400 = -VND30,400

In this case, the customer does not earn any profit from investing in the covered warrant (CW).