Tuesday, December 28, 2010

Structured Warrants – Basic Trading Strategies II - Part 6

We have arrived at the last article of the series. This article is a continuation of the previous article, which has focused on simple trading tactics using structured warrants. This episode will explore the various trading disciplines required to be a savvy warrant trader.

He knows both the Underlying Stock and the Warrant: The typical warrant trading pitfall is neither knowing the stocks, nor knowing the levels. More than often, investors and traders take a short-term punt on stocks and/or warrants that they have no more then a mere passing acquaintance with. Worse, the entry technical levels are erroneously picked, and the exit levels neglected when blinded with greed. The more savvy warrant investors and traders watch only a handful of stocks, and pick a few warrants amongst the list to follow closely. They can trade a few warrants in the short-term, but they know they can never construct a portfolio of warrants over a medium or long-term horizon. Be nippy and sharp with warrant trades.

A good warrant trader will most definitely be doing technical analysis on the underlying stocks as part of his homework. But he will never extrapolate technical analysis onto his analysis of any warrant. For a warrant, a trader can never pick the absolute bottom or pick the absolute top. He could chart the underlying stock to generate the buy/sell signals before turning to select the trade-able warrants based on warrant variables (implied volatility, effective gearing, time decay, Greeks), but charting a warrant is a disaster in the making. Warrants are constantly influenced by time decay and a chart would need curved trend lines rather then linear ones to take this into account.

A good warrant trader knows the warrant that he is buying – he knows the strike price, the effective gearing, time decay, and the Greeks. There is no point in buying a warrant for a medium term view when it expires in few weeks time. He will also follow another axiom - never buy yesterday’s winners. This applies especially in warrants, which have made a huge move. The delta might have increased significantly, while the effective gearing drops drastically. If a warrant doubled up yesterday, chances are that both the smart trader and the issuer would want to focus on another warrant with a higher strike level. The trader wants to maintain good gearing, while the issuer wants to maintain reasonable delta. Bear in mind that when the delta gets too high, the warrants could suffer from the wide bid-offer spreads posted by the market maker (recall article 4). Due to the minimum tick size of the underlying share, a very high-delta 1-for-1 warrant could be quoting close to X ticks apart, defined by the minimum tick size of the underlying share. If the underlying share move 10 sen a tick, a very high-delta warrant has to maintain a 10 sen spread too.

Would a good warrant trader “chase” a warrant? The question is no different from “would he chase a stock?” If the stock continues to move upwards, he would most likely trade the momentum using the warrant. Waiting for any retracement only for it never to happen could be a poor warrant trading strategy, but do bear in mind that timing the move is extremely important in warrant trading. Yes, part of winning in the warrant trading game is protecting your capital like a bull terrier, but warrants, by itself, is a momentum instrument. Hence, do trade the momentum.

Would a good warrant trader average down? He would not. The trend is a trader’s friend – he would never fight it, especially in warrant trading. If the underlying share is heading down, do not buy the call warrants, or average down, in anticipation of the turn. Remember these: (a) if the directional view is wrong, the warrant will be a double-edge sword that could cut deeply; (b) even if the stock consolidates after the selldown, the warrant will still suffer time decay. A 50% loss requires a 100% gain to get back to the starting point. Never test the lower limit of any structured warrant. One could well ask the question “how low can it go?” on a stock, but on a warrant, the answer is - ZERO! If, however, the trader thinks that the trend is going to remain downwards, he would have taken a look at some puts rather then calls. Do not stay fixated.

He Knowing Volatility: Because volatility is priced into any warrant calculation, a change in the volatility element will have an impact on the price at which a warrant is trading. With several warrant issuers in the market issuing warrants on the same underlying stock, the conventional belief is that investors and traders should look only at the warrant with the lowest implied volatility. But this is only true if the issuer buy back their warrants at a proportionate volatility level. To illustrate, one is better off buying a warrant at a volatility of 60%, and sell it back to the issuer at 55% than to buy a warrant at a volatility of 40% and sell it back at 30%.

The key issue that a warrant trader needs to consider when looking at volatility is not necessarily the absolute level of the volatility the warrant is priced at but rather the level at which the issuer is willing to buy back the warrant. This means consistency in managing volatility on the issuer’s part. Some issuers will change implied volatility intra-day whilst others hardly ever make adjustments. Recall that theta/time decay is one of the often-ignored Greeks in warrants and yet it can be a silent killer.

While it is true that a warrant will lose an amount to the time decay, it is crucial to time the entry and exit points on warrant trades. Buying a call warrant only on strong upward move after periods of consolidations means the position has skipped a long period of time decay compared to holding the same warrant across the lull period. It also means that there is lesser room the issuers could manage volatility in the pricing process. In the extreme cases, issuers will move the implied volatility in favour to warrant buyers. This has happened in cases spurred by sudden market shocks, like a catastrophe or a war.

On very short-term warrant trades, time decay and volatility may be less of an issue. Else, a good warrant trader will trade only the momentum, and trade especially the breakouts.

He Knows the Issuer and Liquidity: Without a doubt one of the merits of structured warrants is that there is a guaranteed liquid market with the issuer committed to be a buyer at all stages and seller as long as the delta is low. What this means is that should all other buyers dry up, a warrant holder will still be able to sell to the issuer at their “fair value” for the warrant. However, in reality, this seldom materialises for warrant markets at infancy stage. Yes, the issuers are always in the market, on both sides of the spread, but the spread could be less than efficiently tight. At issue is the fact that the laws of supply and demand do not necessarily kick in when issuers make their spread. The spread is controlled by the issuer and is just an "adjusted view" of the underlying stock, while the issuer supports the "fair value" of the warrant.

There is a school of trading thought that favours liquidity - unless a warrant engage serious volume everyday, they will not trade it. This is true in the early days of warrant trading, when the warrant details are not readily available. In those days a liquid warrant was undoubtedly a better deal. In current times, with information abundant, the volume of warrant traded is of less importance when selecting a winning warrant. In fact, chasing the most liquid warrants may lead one to engage in the wrong trades in warrants that are totally unsuited to his risk and trading profile. Always trade warrants with as tight a spread as possible, as opposed to the heaviest volume traded warrant. They could happen to be the same warrant, but identify a warrant trade to enter and exit at the issuer's level, rather than hope that the rest of the market helps to bid the trade out.

Of equal importance is that the spread on the underlying share has to be tight and liquid. Do not trade a warrant of which the underlying share exhibits a tendency to trade with a huge spread periodically. As long as the underlying stock is liquid there will never be a concern about the liquidity of the warrant. This is because issuers hedge their position in the underlying stock - as long as they are able to do this hedge they can make more and more warrants available at that same price – thus making the warrant as liquid if not more so than the underlying share.

He Knows Himself: More often than not, warrant investors and traders alike lose the discipline and became scattered-brained with the inherent risks of structured warrants. Fixation on the direction and target price of the underlying stock means that risks of leverage and time decay are forgotten. Anything that can move 100% or more in a few days can also lose 90% in the same period. The rewards justify the risks but the risks are great. Adding to the risk of gearing are well out-of-money warrants which will expire worthless and often spend the last couple months trashing investors’ and trader’ confidence as they tend towards zero.

Do some paper trades before trading warrants with real money. This allows a trader to develop a system without incurring risk and any lesson learnt over the paper trade would not cost a single sen. Construct a fictitious portfolio and trade stocks and warrants using warrants only to leverage the portfolio when the timing is right. While it is horrendous to see how right some trades can be, unfortunately only on paper, at least any losses will not cause any sleepless nights and undue stress. After a few months, the new warrant trader will realise that warrants could well be used as a leverage tool when the timing is appropriate.

Saturday, December 25, 2010

Structured Warrants - Basic Trading Strategies I - Part 5

We have covered the basics of structured warrants in the previous four articles. The next two articles, starting with the current, are crucial in determining how you could play the warrant trading game. Bear in mind there will be no perfect strategy to employ, based on wide base of risk preferences, market & stock views, and trading ideas from a vast spectrum of investors and traders. Thus, instead of trying to even suggest the optimal trading strategy, let is explore all employable strategies and required techniques and disciplines. In this article, we will look at three broad trading strategies, and three simple trading axioms to live along with.

Basic Strategies: The three basic strategies for using structured warrants are: (1) speculation; (2) hedging; and (3) cash extraction.

Speculation: If one could draw a parallel between the stock market and a casino, then using structured warrants can be viewed as an aggressive punt in a casino. It sounds like an adrenalin rush for day traders, but warrant trading can be systematically executed in taking a short-term directional view. The most important premise that justifies this strategy is the "unlimited upside, limited downside" feature of structured warrants. Recall that although warrants can potentially multiply both gains and losses (the effective gearing concept), investors or traders alike can only lose the price of the warrant (actually it is contradictory to include investors in this strategy, but we do have investors who want to time the market). Generally the cost of a warrant is significantly lesser than the price of the underlying share. This makes structured warrants a near-perfect replacement for penny stocks. Combine this with market variables in tight bid-offer spreads and low transaction costs and commissions, speculators could capitalise on short-term views based on their own guile, methodology and judgment. The most savvy of these traders trade for upsurge in volatility (means buying call warrants before the underlying stock undertake a huge move up), low delta and high effective gearing, and minimise time decay via short holding period (many are intra-day positions). The deployment of this strategy is based on gearing, but the golden rule underlining speculation is always about balancing greed and fixation. Be warned that it a leveraged directional bet - so if the directional view is wrong, learn to cut loss.

Hedging: For high networth investors, over-the-counter options are often structured by private banks to help them hedge against short-term volatility and uncertainties. In the same way, warrants could be used as a form of insurance to protect an existing share portfolio against a falling market. Put warrants allow the investor to retain share ownership without realising capital gains and without having full exposure to the downside risks. For the laymen market participants, however, hedging via structured warrants became more of a theoretical portfolio possibility than a practical application. First, few investors could comprehend the contradiction of hedging short-term volatility (say buying put warrants) against their longer-term portfolio view. Second, there are structural issues - such as the lack of script-borrowing facilities for hedging and short-selling constraints. These are factors contributing to the fact that the warrant market typically lacks the breadth of put warrants available for hedging purposes. Third, the portfolio hedge is a dynamic process. In a delta-neutral hedge, the investor has to work out X number of warrants with a certain delta to create a position that totally neutralise the potential loss in his share holdings. If he is holding 10,000 shares, he needs 25,000 put warrants with a delta of 0.4. If the share price falls by 50 sen, his portfolio will decline in value by RM5,000, but the put warrants will be trading 20 sen higher (0.4 of 50 sen). 25,000 put warrants will totally negate the loss. However, in practice, the delta changes so fast that periodic adjustment or rebalancing is required to maintain such a perfect hedge. This is reminiscent of the concept of gamma – rate of change of delta. If the gamma for the put warrant is high, the hedging process will be extremely tedious.

How about using a call warrant to hedge? Sure. An investor interested in purchasing shares who does not have immediate access to funds could purchase call warrants to capture the benefits of an anticipated price rise. This would allow the investor to establish a price (the exercise price) at which to purchase the shares in the future.

Cash Extraction: Call warrants could be used to free up capital invested in shares. This defensive strategy is often overlooked in a volatile market. An investor may sell existing share holdings and purchase a corresponding number of call warrants for a fraction of the price. He thus has maintained exposure to share price rises while releasing capital from the security holding. Gearing in this case means maintaining market exposure while limiting total capital risk. Again, as with the hedging strategy, the cash extraction strategy means a dynamic approach is required.

Two of the major drawbacks of the cash extraction strategy are loss of dividend/corporate exercise rights and time decay. Investors holding warrants do not receive the dividends paid on the underlying shares, nor or do they directly participate in rights or bonus issues. However, in valuing warrants, issuers estimate the expected dividend stream of the underlying shares. This means that call warrants should not dramatically fall in price when the underlying share trades ex-dividend. Similarly, put warrants used in the hedging strategy will not substantially increase in price. Generally, in the case of a rights or bonus issue, the terms of the warrant are adjusted so that the warrant holder will not be disadvantaged.

Afterthoughts: Whichever strategy an investor or a trader choose to employ, three principles of warrant trading need to be reminded and guarded vehemently.

First, know when to cut loss. A stop-loss discipline is the single most integral part of a warrant trader’s mindset. Because of its leveraged nature, warrants are double-edged swords in any portfolio, regardless of timeframe. Even if a successful warrant trader have been rolling over few series of warrants (higher and higher strikes) to maintain reasonably low delta and high effective gearing, cutting loss at any time simply means the trader has minimised downside risks while locking in early profits. While it could be true that the cut-loss view might be wrong, in that the share/warrant might reverse and surge over the next few days, holding on to the warrants and see it trending down towards zero is a much more painful process. In many cases, the notional of the warrants became so small that the settlement amount could not even cover brokerage costs.

What level to set the stop loss? Follow the technical analysis of the underlying stock. For instance, a bullish candlestick formation might trigger a long position, but a tightening of a Bollinger band might mean tighter trading range to be expected and thus warrant a cut-loss or take profit position. The most disciplined trader will use a trailing cut-loss strategy – cut-loss points trailing the stock as it gets higher. It is not an exact science, but it is extremely logical in the realm of structured warrants. Also remember – it is a momentum instrument – cut loss when the underlying stock is trading flat. Time decay will erode the warrant’s value day by day.

Second, do not average down a losing position. If an investor has bought some warrants at 40 sen, and the warrant inexplicably falls to 35 sen, it makes more sense to cut-loss than to average down. Warrants are not stocks – they have limited lifespan, and always be reminded of time decay. The issue here is that the market is a vast mass of collective sentiment of which any investor’s view is not even a drop in the ocean. A warrant heading down is doing so for a very good reason. Wrong view? Bite the bullet and cut loss, instead of digging a bigger hole.

Third, no one ever went broke taking profits. As mentioned in the previous article, one way to circumvent time decay is to hold a short term trade for any warrant, and roll over to another warrant with ample time value. For instance, in a trending market, the investor could have bought a 9-month warrant in January, roll it over to another 9-month warrant after in April, and repeat the process in July. There are two critical aspects in this strategy – that the investor moderates the time decay while maintaining leveraged market exposure, and that the investor renew the strike target every 3 months, thereby maintaining efficient effective gearing ratio and locking-in gains from intrinsic values in the process. This beats holding a single warrant across the entire lifespan. Inherently, this strategy "locks up" profits along the way.

Our next issue will be the last in the series. We will discuss more on trading discipline underlining warrant trading strategies.

Thursday, December 23, 2010

Structured Warrants – Gearing & Greeks - Part 4

In this article we will look at gearing factor and sensitivity coefficients – the Greeks which measure change in warrant value via change in other variables.

Gearing & Effective Gearing: Structured warrants cost only a fraction of their underlying shares. They provide holders with greater exposure to price movements as they generally rise and fall more steeply in percentage terms. If a warrant is priced at RM0.30, and the underlying share is trading at RM1.50, the gearing is 5 times. The price of one warrant offers exposure to 5 shares. In bull markets, warrants will always be among the top risers and the opposite holds true in bear markets.

The definition of gearing is:

Gearing = Share Price / Warrant Price (adjusted by exercise ratio)

The following chart plots the relative price movements of a call and put warrant against corresponding movements in the underlying share price. Note the percentage change in the value of the underlying share compared with the value change in the call warrant and the put warrant. During a 3-month period, the underlying share price falls by 10% (at Point A) and increases by 8% (at Point B) - share price varies over an 18% range. In contrast, the call warrant fluctuates within a 75% range, while the put warrant fluctuates within an 80% range but in an opposite direction to the call.

Gearing decreases as the share price increases.

Delta & Gamma: Delta refers to the rate of change of warrant price for a given change in the underlying share price. For call warrants, the delta will fall between 0 and 1; for puts it will be between 0 and -1. At 0, the warrant is impartial to any moves on the underlying share. At 1, the warrant is expected to move sen-for-sen with the underlying share. Typically, at-the-money warrants will have a delta of 0.5. As the warrant moves in-the-money, the delta will approach 1.

The most savvy of traders will aim for medium-delta warrants, in the range of 0.4 to 0.5. Any delta too low will denote an out-of-money warrant with strike too far away.

The delta is a constantly changing number. The rate of change of delta is known as the gamma. One could visualise delta as the speed of the warrant, and gamma as the acceleration. The gamma simulates the changes on the warrant price for different underlying share price. Any move on the underlying share will move the delta higher, as with the gamma.

Vega: Vega measures the sensitivity of warrant price to change in volatility. Vega is the highest for at-the-money warrants, and tends to be higher for longer-dated warrants.

With several issuers issuing warrants on the same shares, the belief is that investors and traders should focus on the warrant with the lowest implied volatility. This is only true if the issuers will buy back their warrants at a proportionate volatility level. An example would be buying a warrant at an implied volatility of 45%, which the issuer buys back at 42% versus buying a warrant at a volatility of 40% that is bought back at a volatility of 30%.

Theta: Also known as time decay, Theta is expressed in terms of sen or percentage per week (or per day closer to expiry). Eventually, the warrant will need to lose the time value entirely. But theta is not linear to time – it will get proportionately larger as it approaches expiry.

Rho: Rho measures the sensitivity of warrant prices to changes in interest rates. However, the level of interest rates, as a variable, is likely to influence neither warrant pricing nor trading decision making process.

Final Thoughts: The Greeks do not help answer which warrant to buy. However, they are reliable forecasting tools on the changes in warrant prices versus the underlying share price movements.

In the next issue, we will discuss some basic strategies on trading structured warrants.

Tuesday, December 21, 2010

Parameters & Variables of Structured Warrants - Part 3

To figure out the relationship between share price and the associated warrant price, the investor has to break down the premium factor that he/she pays for.

Premium, Intrinsic & Time Values: The premium measures the extra cost incurred when buying a warrant and “exercising” the warrant into share over direct share purchase.

Premium = [(Warrant Price + Exercise Price) - Share Price) / Share Price] x 100%

Example (Diagram 1): if a warrant priced at RM0.50, has an exercise price of RM1.00, while the underlying share price is RM1.20, the premium on the warrant is 25%.

Premium (%) = [(0.50+1.00)-1.20]/1.20 x 100% = 25%

Besides premium, there is another dimension of valuing structured warrants, based on intrinsic and time value.

Warrant Price = Intrinsic Value + Time Value

The intrinsic value of a warrant is the difference between share and exercise price. In our example, the warrant’s intrinsic value of RM0.20 represents the possibility of buying shares for RM1.00, even though the market share price is RM1.20 (Diagram 2).

The additional RM0.30 is known as the time value. It reflects the payment for profit opportunity if the underlying share moves in the warrant buyer’s favour. In our example, if the warrant was to expire tomorrow, it would be priced around RM0.20. But if the warrant has 9 months before expiry, there's a high chance of the share price increasing. At a time value of RM0.30, this tells us that investors are willing to pay RM0.30 for the potential future gains before warrant expiry. The downside is that time value will fall closer to zero as the expiry date approaches. This is known as time decay.

If a warrant is out-of-the-money, by definition the warrant has no intrinsic value. In this case, the time value component accounts wholly for warrant price.

The price will not be lower than its intrinsic value due to the possibility of a risk-less arbitrage – where one buys the warrants and exercises them into shares, for a lower market share price. If a warrant is deep in-the-money, or expires shortly, the price may trade at a small discount to its intrinsic value.

Valuing Premium & Time Value: A warrant with a time value of RM0.20 is not necessarily “cheaper” than one at RM0.30. Both premium and time value parameters must be used in comparisons.

Deep out-of-the-money warrants have high premiums, which get lower when becoming more in-the-money. Premiums are regarded as measures of warrant price. While intrinsic value is directly related to share and fixed exercise price, the unpredictable nature of time value makes analysis difficult.

Implied Volatility: In determining “fair value” of warrants, the most adopted pricing model is the Black-Scholes one. It takes into account the inter-relationship between share and exercise price, expiry date, risk-free interest rate and volatility.

Volatility represents absolute price movements, of the underlying share over a time period. Traders need to understand that huge volatility is actually beneficial due to “limited loss, unlimited upside” characteristics of structured warrants.

There are two volatility types – historical, which calculates past variations of underlying share price, and implied, which represents market expectations of future volatility in underlying share price.

Examining historical volatility requires care, since short-term can differ from longer term. Besides underlying share direction, investors need to question if current volatility is likely to continue.

Implied volatility is derived from working backwards the current warrant price through the Black-Scholes equation. A warrant is expensive if implied volatility outweighs historical volatility assuming full market efficiency. In reality, implied volatility takes into account maturity length, nature of warrants, and spot/strike levels. Implied volatility is generally higher for longer-dated warrants and put warrants and at-the-money warrants.

In the next issue, we will discuss the last of variables - gearing and effective gearing, as well as the sensitivity coefficients – the Greeks (Delta, Gamma, Theta, Rho, and Vega) - and their applications in warrant trading strategies.

Thursday, December 16, 2010

What exactly are structured warrants? - Part 2

Basics of Structured Warrants

Back to Basics: Structured warrants are proprietary instruments issued by financial institutions that give holders the right, but not the obligation, to buy or sell the underlying assets (in our series, shares) at a future date for a fixed price. The two basic types of structured warrants are call warrants and put warrants. A call warrant gives the holder the right, but not the obligation, to buy the underlying share for a fixed price known as the exercise (strike) price at a future date. This is a synthetic long (buy) position in the underlying share. A put warrant gives the holder the right, but not the obligation, to sell the underlying share to the warrant issuer for the exercise price. This is a synthetic short (sell) position in the underlying share. Call warrants allow the holder to profit from share price increases. Put warrants allow the holder to profit from share price declines.

The differences between traditional company-issued warrants and structured warrants is best described in the table below:

Company-issued warrants Structured warrants

Issuer Company over its own shares Third party banks or financial institutions

Dilution New shares issued upon exercise No new shares issued

Type Limited to call warrants only All natures : call, put, exotic, spread

Expiry Typically spans over many years Typically spans over 6 months to 1 year

Liquidity Dependent on market forces, typically low or inconsistent Depending on market maker, high

Holders Individuals, institution vested in company Investors, traders

Pricing Subjected to demand & supply Priced by market maker to option models

American or European? These two styles of exercise for warrants deserve some closer scrutiny. An American style warrant allows holders to exercise their warrants at any time up to and including their expiry date. European style warrants allow exercise only on the expiry date. All structured warrants issued and listed on Bursa Securities thus far have been American style call warrants (the reasons why call warrants are issued and traded more often than put warrants will be covered in future sections). This is intriguing. For issuers, European style warrants are simpler due to infrequent exercise – only on expiry. In markets of Europe, Hong Kong, and Singapore, there is a historical precedence of the European style warrants. In actuality, neither style seems to have any significant advantage over the other. For investors, the American style warrant appears more preferable owing to exercise flexibility. In reality, where there is active and efficient market making, the existence of time premium before maturity usually makes it uneconomic to exercise listed American style warrants early. Think about it – the lower premium of the European style warrants will be more valuable than an early exercise right which is rarely taken up. So are the American style warrants pricing in additional premium at placement stage? In this aspect, expect to see an evolution of issuance preference in favour of European style warrants.

Strike it Rich: A call warrant is out-of-the-money when the exercise price is higher than the share price and in-the-money when the exercise price is lower than the share price. It will be worthless if the share price is lower than the exercise price on expiry. However, with upward movements in the share price, the holder can still earn excellent returns trading the warrant prior to the expiry date. This is known as the gearing factor (to be covered in subsequent sections).

Right Cover: The exercise (or conversion) ratio of a structured warrant is important in determining the quantity of warrants needed to exercise to buy or sell one underlying share. In the analysis of any warrant, or comparison of many warrants, check the exercise ratio. If the pricing appears far off, the reason could be an erroneous assumption of exercise ratio. To be objective, ensure consistency by, for instance, restating all prices on a “per warrant” basis.

Let illustrate with an example – two similar warrants (same exercise price, expiry) with different exercise ratios. A 1:1 warrant trades at RM0.50, and the other (2 warrants for 1 share) trades at RM0.30. The latter might appear attractive on an absolute basis, but it is actually carrying a higher premium over the RM0.50 tranche.

Settlement: Structured warrants are typically cash settled. In European style warrants, holders redeem a cash amount equivalent to the amount the warrant expired in-the-money. In the local context (American style), holders redeem a cash amount equal to the difference between the closing price prior to the exercise date and the exercise price. For example, if a Gamuda call warrant had an exercise price of RM5.00, holders will receive RM0.50 if Gamuda shares closes RM5.50 the day prior to the exercise date, assuming a 1:1 exercise ratio. For investors, the importance of knowing the precise exercise ratio plays a part in calculating the cash settlement amount.

In the next issue, we will discuss the various basic parameters (gearing, intrinsic and time values, premium) as well as advantages and disadvantages of using structured warrants to enhance your portfolio.

Wednesday, December 15, 2010

General Overview of the Structured Warrant Market

For your reading pleasure... :)

Growing like Wild Fire : The structured warrant markets in Asia underwent a huge metamorphosis in 2006. The success was partly attributed to the buoyant regional stock market, and partly to the growing familiarity of the momentum instrument. With a furious bullish undertone, turnover in warrant trading now accounts for nearly 30% of Hong Kong's total turnover compared with just 7-9% a few years ago. In Singapore, it contributes to 5-10% of total daily turnover. In Korea, where structured warrants are known as equity-linked warrants (ELWs), the turnover now comprises 10% of overall market turnover since inception in December 2005.

Such appetite to consume volatility is evident in Malaysia, despite its slow growth momentum since the new guidelines from the Securities Commission (SC) came into effect in May 2003. Bursa Malaysia shifted gear in the second half of 2006 - we saw CIMB accelerated its warrants issuance program, while AMMB and OSK Securities followed in tandem. Still, the warrant market over here is relatively small and inactive - from 12 call warrants at the end of 2005 to 35 currently.

So what is to be expected in 2007?

Planting the Seeds: Expect to see further relaxation of the listing requirement. The current placement methodology (new issues need to be placed to 100 holders, or 50 holders each subscribing to a minimum value of MYR100,000) is a barrier to expand the warrant market. Hong Kong and Singapore have abandoned such pre-placement regulations in 2001 and 2004 respectively, and have since replaced it by the "warrant supermarket" approach ¨C where issuers can list all sorts of warrants and "shelf" them for public consumption. Risk management takes effect not until the warrants are consumed in the secondary market. The result is a heavy influx of warrant launches. Listing fees were lowered and made competitive as an effect (not a cause) of the huge supply of issuance.

Such supply-driven dimension has serious connotations in fuelling the popularity of structured warrants. Currently, there are 20 and 13 issuers in Hong Kong and Singapore respectively, although only a handful accounts for market dominance. They compete to issue or roll-over new warrants with relevant strike levels as the market trended upwards throughout 2006. As it stands, there are 550 structured warrants listed on SGX, compared to 35 on Bursa Malaysia (note that both SGX and SC revised guidelines in 2003). The other implication is that the breadth of the issuers and the warrant issues will inevitably translate to the depth and market making efficiency on the warrant market.

Keeping it Fair, Tight and Liquid: Prior to the current market making system, daily prices of structured warrants were based strictly on forces of supply and demand. There was simply no guarantee of ample liquidity on a day-to-day basis. Nonetheless, the existing market making system has not eradicated the legacy of doubt and suspicion. Recent examples were the quotations of two call warrants - Resorts-CA and Genting-CA, which traded in opposite directions to their respective underlying stocks. Issuers' goodwill is thus eroding fast.

The challenge for Bursa Malaysia is to induce inter-warrant competition from foreign issuers running on a global platform to improve the overall market making efficiency. Reputational risks will increase with more issuers competing on a selective group of stocks. Any inconsistency in pricing from volatility manipulation or failure to maintain a tight bid-offer spread will be fast acknowledged by the demand side. While the appetite to consume volatility can become more than manageable on the delta- and gamma-hedging fronts for some issuers, a more competitive supply side will evolve in the hedging front and collectively adopt less defensive market-making techniques.

Teach and Reap : Bursa Malaysia, the issuers, and the distributing brokers are obviously anxious to keep the local warrant market moving, and thus need investors to understand structured warrants, trade skilfully and profit from it. In Hong Kong and Singapore, warrant issuers actively provide data on warrants indicators and conduct (sometimes joint) product seminars on warrant trading. Websites with tools and simulators of prices based on different pricing parameters are clearly lacking here.

Final Thoughts: There is definitely more scope for growth in the structured warrant market in Malaysia. As the above-mentioned changes are foreseen, so would the trading mentality evolved. The typical buy-and-hold warrant trading strategy will only succeed with efficient market makers from a breadth of issuers. High delta in-the-money warrants will be replaced and rolled over fast with relevant strike levels, and issuers need not resort to defensive market making tactics (e.g. widening the spreads) and rapid implied volatility adjustments. Else, investors and traders will adopt a shorter holding period for structured warrants upon closer scrutiny of the various market-making mechanisms employed by the issuers. In markets like Singapore and Hong Kong, about 90-95% of total turnover on structured warrants were contributed by day-trades on average. This is a natural evolution after 3-4 years of product adoption. The Malaysian warrant market cannot afford to undergo this chicken-and-egg syndrome at such infancy stage, where overwhelming participation from the day-traders prevails over the actual retail clients.

In the next issue, we will discuss the basics of structured warrants.

Monday, December 13, 2010

Received GAB's Dividend

1. Just received GAB's dividend. :) Next round of dividend should be around April. Touching RM10 and above, is just a matter of time. :)

2. BJTOTO ramp up 10sen instead after the news. Thought the sell off would be greate but it turn out otherwise. Nevertheless, just keep till the ex if can't buy more.

3. All futures stock are in green zone. :) would expect another good run tonight for Dow Jones. Just have to wait and see. C may run up further. :)

4. As of today, stay put and do nothing. :) All portfolio remain unchanged. Till then happy trading.

Saturday, December 11, 2010

BJTOTO - Time To Scoop ?

1. I did a scalp trade again on Gamuda-CI. :) Quick in quick out and fast money. :)

2. C has reached USD4.77 yesterday. I continue to be bullish on C, as now that the government has unloaded its stake in the company. Minimum USD5 is not a problem. :)

3. We should be glad if BJTOTO drop below RM4 due to below news, that's mean is an opportunity for us to grab more. 1 or 2 Q profit drop is nothing, so long as we know the future projection is good and dividends keep coming. :) We should be happy when people are in fear. Just watch and see how much we can scoop if it really come. :) 

BToto Q2 net profit down on higher prize payout, duty
PETALING JAYA: Berjaya Sports Toto Bhd (BToto) made a net profit of RM65.1mil for its second quarter ended Oct 31, which is 36.5% lower than the RM102.5mil posted in the same quarter last year, mainly on higher prize payout and pool betting duty.

Revenue for the period came in at RM845.8mil against RM857.1mil previously while earnings per share stood at 4.87 sen compared with 7.62 sen. The numbers-forecast operator declared a second interim single-tier exempt dividend of 4 sen per share for the quarter.

The drop in revenue and profits was due to lower number of draws and an increase in pool betting duty from 6% to 8%, coupled with higher prize payout, BToto told Bursa Malaysia yesterday.

Barring unforeseen circumstances, the directors are optimistic that the group's operating performance for the remaining quarters of the financial year ending April 30, 2011 will remain satisfactory, it said.

For the six months ended Oct 31, BToto made a net profit of RM129mil compared with RM203mil a year earlier.

Thursday, December 9, 2010

This Bull Is Being Recharge !!!

1. So far, nothing change in my portfolio. Still keeping them tight and ride with the rally. :)

2. Market is very active and bullish. Likely to inch higher. Did some scalp trades on Genm-CL and Gamuda-CI, earn some pocket money for lunch. :) I don't trade warrants unless i see some opportunity there. This kind of trade is either win or lose but when you know the mother is gonna come, then very high chance you will make money on its warrant. :) That is the indication. This type of game is very dangerous when market go against you, as warrant is being structured as an instrument for "leveraging", you can lose your paint out if not careful. I trade warrant for fun and excitement with very small quantity. As this is a quick trade, i often closed them within intraday. :)

3. Many of my investment already bear fruits, collected dividend from Amfirst, Hektar, Atrium and many more to come. Carlsbg, GAB are up, C, GSP, Golden Agri are up. Some have sold early like DRBHCom, Kfima, Qcaptical also up. Every thing seem to go up, up up !!!! :) Christmas rally, New Year rally, CNY rally all up. :) Most likely we have good time till the next 1H. :)

Wednesday, December 8, 2010

REITs: Few earnings surprises

Living up to their reputation for comparative predictability and low risks, earnings results for real estate investment trusts (REITs) for the latest quarter ended September 2010 offered few surprises.

CapitaMalls Malaysia Trust (CMMT) announced its maiden earnings results for the period from July 14 to Sept 30 — reporting net profit of RM21 million, which was just marginally ahead of the forecast made in its prospectus.

Its three properties — Gurney Plaza in Penang, The Mines in Selangor and Sungei Wang Plaza in the heart of Kuala Lumpur — have a combined net lettable area of almost 1.88 million sq ft and maintained almost full occupancy, averaging at roughly 98.3% as at end-September.

Leases up for renewal in the year-to-date — which accounted for about 16.9% of total net lettable area under its management — too have registered positive rental increases, ranging from 2.5% for Sungei Wang and 6.6% for Gurney Plaza.

CMMT’s maiden profits distribution expected in 1Q2011

CMMT has committed to distributing 100% of earnings in the first two years of listing and at least 90% of annual profits thereafter.

We expect its first dividend payment for the eight months to December will be paid sometime 1Q2011.

Based on the trust’s earnings forecast, distribution will total 4.78 sen for this year and 7.44 sen for 2011. That would earn unit holders a yield of 4.2% and 6.6%, respectively at the current price of RM1.13.

CMMT is a pure play shopping mall REIT sponsored by CapitaMalls Asia, a member of Singapore-based CapitaLand group of companies. It was one of the two REITS listed on the local bourse this year and is currently the second largest in terms of market capitalisation.

Similarly, Quill Capita Trust’s earnings results for 3Q2010 were broadly in line with expectations. Net profit (excluding unrealised gains/losses) was up a decent 7% year-on-year (y-o-y) during the quarter and 4% for the nine months to date. It is on track to meet our earnings estimate of some RM34 million for the full year.

Assuming the same level of profit payout as last year — just over 92% — distributions would total 7.91 sen per unit, which would give unit holders a fairly attractive yield of 7.3% at the current price of RM1.08. The trust made an interim distribution of 3.85 sen per unit back in August.

Quill Capita is trading below NAV of RM1.22

Quill Capita made no new acquisition in the past two years but is believed to be looking at two properties within the Klang Valley worth some RM400 million.

At present, the trust has 10 properties in its portfolio — with net lettable area totalling more than 1.29 million sq ft — worth RM788 million. Its assets, primarily commercial-industrial properties are located in Cyberjaya, Kuala Lumpur, Selangor and Penang.

In addition to attractive yields, Quill Capita is currently trading below its net asset value of RM1.22 per share. That suggests room for capital gains for investors.

On the other hand, AmFirst REIT’s underlying earnings for 2QFY2011 were a little disappointing.

Revenue fell 10% y-o-y and 12% quarter-on-quarter (q-o-q) to RM22.1 million due, primarily, to a drop in the average occupancy rate for Kelana Brem Towers — to 63.8% as at end-September — and rental rebates as compensation for the disruption during refurbishment works at Summit Hotel.

More positively, occupancy at its flagship properties, Bangunan Ambank Group and Menara Ambank remains high at 95% to 100%.

One-off gains boost AmFirst’s profits distribution in FY10

However, thanks to some RM1.89 million in compensation for the compulsory acquisition of land fronting The Summit Subang USJ recognised during the quarter, net profit improved to RM10.6 million.

A further RM3.78 million will be recognised evenly in the next two quarters, which should boost total distribution for the current financial year — we estimate at 10 sen per unit assuming 100% payout. That will earn unit holders yields totalling 8.5% at the current price of RM1.18.

Nevertheless, earnings in the following year are likely to be lower in the absence of further one-off gains. As such, we forecast distribution could fall to around nine sen per unit in FY12, which would, nevertheless, still give investors an attractive 7.6% yield.

Although the trust registered positive rental revisions for several of its properties this year, the anticipated supply of office space coming onstream over the next few years would likely keep a lid on the quantum for future hikes.

AmFirst is currently in the midst of acquiring an additional retail lot in The Summit for RM6.8 million but has aborted plans to buy a five-storey building in Cyberjaya. The acquisition is targeted for completion by end-2010.

Monday, December 6, 2010


1. GAB share price created record high each day. :) Look like RM10 is where it is heading to. As the  share price surge higher the DY become unattractive. It used to be high DY around 8+% but after a recent surge of price its dividend has shrunk to a mere 5% based on current price. It is good for those who got it way back when it is still trading around RM4 to RM5, they would enjoy both capital appreciation and share dividend. :) I do hope that the dividend will step up in order to remain as attractive and resilient as before.

2. GAB has a bigger market share in Malaysia comparing to it peer CARLSBG. This will seem create more room for CARLSBG to grow if GAB continue to up surge into RM10 region. Though, CARLSBG's business has seem lose out to GAB in Malaysia but it synergy with CARLSBG(S) has bear fruit so far. :) The EPS has almost on parred with GAB, which i think it is good sign for CARLBG to do a catch up job Q after Q.

3. Make money online - Just received a cheque from Nuffnang for advertisement effort in my blog. Also another network advertising company Innity has made the payment recently. Good enough for lunch money though. :)

Thursday, December 2, 2010

Another Good Run Expected !

1. Dow Jone green again today. :) My C also garner another 10c. :)

2. Just gotten my ATRIUM's dividend today. :) In total based on my cost together with DPU collected so far. The total % gain is about 47%. Not bad huh !!!

3. Below is the reference for those who own PANTECH. A very good reference provided from my long comrade hng. Thank you my friend. :)

hng // December 2, 2010 1:41:00 PM GMT+08:00

Pantech-LR is only very little stake in portfolio, compare to two major stocks holding now: PJdev and Uchitech. But, if i opt for full conversion to pantech ICULS, it could be quite substantial though.

Based on current pantech share at 63sen, each ICULS subscription cost at 10sen + 1.65sen pantech -LR = 11.65sen nett cost. To convert to pantech share, have surrender 6 ICULS for 1 pantech share. But the conversion period last for 7year, and each year ICULS received interest payment of 0.7 sen or 6% nett yield based on my cost holding of 11.65sen. In addition, 10 ICULS entitle 1 free warrant which have exercise price at 60sen over a period of 10year.

Upon listing i think, warrant could worth at least 10-15sen, while ICULS should at 11sen if pantech share manage to hold its price above 60sen. All in, current pantech-LR at 1.5-2sen may just generate very modest potential return. Thus, i'll either opt to sell later before ex-right at least 2sen for quick profit or go through whole exercise which have limited upside but ICULS interest payment semi-annual and free warrant could cushion downside risk

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