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Investors are flocking to buy put warrants, pushing up prices and turnover in what is fast becoming the world's biggest market for this highly leveraged instrument.

Put warrants, a type of security issued by a corporation usually together with a bond or preferred stock that gives the holder the right to sell a certain amount of common stock at a pre-determined price, are widely used by investors as a surrogate for short selling.

Strong demand has been seen for all 25 available warrants except for China Vanke Co, which was suspended from trading, and Yantai Wanhua Polyurethane Co, which saw a minor decline.

China Merchants Bank and Guangzhou Baiyun International Airport Co put warrants surged by over 13 percent to reach 0.48 yuan (6 US cents) and 1.29 yuan (16 US cents) per warrant respectively.

Turnover of warrants yesterday totalled 16 billion yuan (US$2 billion), compared to 33 billion yuan (US$4 billion) for regular stocks.

"The stock warrant market is pulled by put warrants, which allow investors to achieve a leveraged exposure to a falling stock market with minimum capital and limited risk. At this time when the stock market is expected to correct downward, it is only natural that traders are increasingly looking to profits through trading put warrants," said Zhu Huacheng, a stock analyst with the Xiangcai Securities Co.

They generally increase in value if the underlying asset price declines, while call warrants, which enable the holder to purchase common stock, are the opposite.

Analysts and traders expect a high trading volume of around 10 billion yuan (US$1.25 billion) a day for the remainder of the week. Room for a further price rise is limited as premiums for most warrants have surged to high levels 40 percent on average for put warrants meaning lower returns.

The benchmark Shanghai Composite Index slumped by 4.8 percent to below 1,700 points last Thursday on concerns of a stream of upcoming new share offerings, excessive money market liquidity and industrial output.

On the same day, trading of stock warrants tripled to reach 12.8 billion yuan (US$1.6 billion) and continued to surge to 24.3 billion (US$3 billion) the next day, the highest since early June when regulatory authorities' risk warning notices and market fundamentals sent the warrant market into doldrums.

The majority of speculators behind the warrant market were believed to be individual investors, many of whom were veteran investors in commodity futures as both trading instruments are highly leveraged and are settled on the same day of transaction.

"As in the long term regular stocks are a rising market, put warrants will sag in a few days whereas call warrants will see better performance and lead the warrant market instead," said Yang Haicheng, an analyst with Haitong Securities.

Warrants were first introduced to the mainland market in August 2005 levels and soon became a popular instrument for savvy risk-takers for their high leverage and instant settlement.

Turnover of the mainland's stock warrants in the first five months of this year doubled over 2005 to reach US$52.32 billion, ranking third in the world after Hong Kong and Germany, according to a recent report by Goldman Sachs Gaohua Securities.

(China Daily July 18, 2006)