Choivo Capital

Author: Choivo Capital   |   Latest post: Sun, 13 Jan 2019, 02:51 AM


(CHOIVO CAPITAL) Much ado about warrants!

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One of the things I’ve been thinking about recently, is how does one invest or speculate in warrants intelligently?

Is it even possible for the purchase of warrants to be considered to be an investment?

The main reason for this, this year is the first time, I’ve bought some warrants to be held, instead of a quick punt, and the position is more than nominal. And also because they are all down a minimum of 40%. Hahaha. The warrants I purchased this year, their size, current price and loss is shown as below.

Layhong-WA: RM0.320. It is 1.85% of portfolio on a cost basis, and is now down 50%.

Gadang-WB: RM0.275. It is 0.82% of portfolio on a cost basis, and is now down 40%. The best performer! Haha

Insas-WB: RM RM0.210. It is 1.95% of portfolio on a cost basis, and is now down 65%. The biggest position and the worst performer. Clearly my best decision!

Well, let’s reflect. Or at least, bear with me as I put my thoughts down in words and crystalize my thoughts.



What are warrants?

Warrants are essentially pieces of paper that grant you the option to buy shares at a certain price in a certain point in time.

And historically, they are very popular in under developed markets, where people do not have an understanding in terms of earning per share, or intrinsic value per shares.

Where instead, market participants consider stock splits good things, and warrants to be free gifts from management, as if remuneration.

Needless to say, I’m generally not a fan of companies that do a lot of warrants. I’m sure that if one were to do a study, companies that issued a lot of warrants in the Bursa are likely to be rubbish.

However due to their nature, they can sometimes be severely under-priced, or severely over-valued.

As there is a fixed timeframe. It is also acutely speculative.

In addition, if you actually buy an investment bank issued warrant, FROM an investment bank. You might be retarded. Buy it from stupid people who bought from IB and have to sell cheap. Not IB who make a profit the moment they sell.



Interesting aspects of warrants.

Warrants are in more ways than one very similar to options. They are intrinsically levered instruments, because a much smaller sum is needed in order to get an option to buy a large amount of shares.

As prices are mostly correlated to the share on a nominal basis (they do fall off in an extreme manner once the mother share goes below the conversion price), but off a lower base, this results in significantly higher movements on a percentage basis.

This extreme swings, results in investor psychology going absolutely insane. As they rise higher, with 200% gains being normal on a stock that has risen 30%, the majority  of market participants start to feel the fear of missing out, while those who already have it feel like a genius, both then keep buying and result in severely overpricing.

Likewise, in a downturn, they fall a lot more. And as it falls, people start to become acutely aware of the limited timeframe, which induces a certain panic, as you now can’t help but wonder if the price will ever go up, or if sentiment will ever change (making the error of extrapolating the now into the future). This coupled with the extremely fast drops, result in panic selling at any price, or shocked holding at any price (me probably lol!), and thus it spirals down.

What I’m trying to say here is. The conditions that allows one to invest or speculate in warrants intelligently tend to be very limited. 

Statistically, logically and mathematically sound homeruns in warrants mostly comes from bear markets. Its mostly in these markets, that one 
will be able to buy these warrants using sound decision making profitably. The rest of the time, any profit is likely to be extremely speculative, and well, adventurous. Ie, more gambling and feeling, than cold logic.



The biggest mistake people make in buying warrants.

If you notice how most market participants here think of warrants, the most common way is looking at premiums. We often start by looking at how close is the premium, relative to the time, or if better yet, if it’s at negative premium.

But I think, this is a completely wrong way of looking at warrants. When premiums are low, this is precisely the moment when most warrants are most expensive.

For example, there are so many times, when GAMUDA-WE and GENTING-WA was negative premium, ie selling at a discount to the mother. Currently, GAMUDA-WE is down 70% and GENTING-WA is down 99%.

However, at RM4.8-RM5, or RM9.5. Both companies were already valued richly and priced to perfection. Even the conversion price, despite being lower than the current price, is arguably overvalued. Both companies were also at record earnings.

As my 500% trader friend says, it is at these times, when the easy money can be made. But you must realise, it is trash you’re holding. If you’re not decisive and clear about who you are and what you’re holding. Easy money turns into grenade faster than you can react.

When premiums are low, this is often because the warrant have already risen greatly (often multiple times) up to the share price. Unless the share price is still significantly undervalued compared to its intrinsic value. The warrant is in more ways than one, priced very close to perfection with huge downside.

And usually the shares are not undervalued, as they are currently having record breaking earnings year, mostly due to external macro factors, instead of the inherent improvement in quality and economic power of the business. These earnings are castles in the sky.

This is doubly dangerous, when the current valuation, is not that far off from its exercise price. When it goes from "in-the-money" to "out-of-the-money", the drop will scare your pants off if you have significant amounts in it.

I believe this is how most retailers get burned. Gamuda-WE, Prlexus-WA, Genting-WA, Tguan-WA, Ekovest-WB etc

Warrants with high premiums on the other hand, if bought correctly, have a two factor undervaluation. The main reason why warrants have high premiums, is because they are out of the money.

And often, in bear markets, these warrants are out of the money, because the current valuation given to the shares are so low! This is the first undervaluation.

The second undervaluation comes when, people look at the large premiums, and therefore completely ignore it, despite the significant tenure left, and with the conversion price being an undervalued one!



Speculating/Investing and valuing warrants intelligently

How do we do the above then? Well, I think there are two ways to go about it. One is the investing way, the other is the speculative way.

The methods or process comes from very different kinds of financial instruments. The first being extremely long dated share options, the other being 3-6 month options.


The investing way

Most people do not know this but, back when Warren Buffet did not have as much capital (Still billions, but not 100 billion), one of the methods he used to buy shares, was to make extremely long dated options on stocks. This was because there were times, he wanted to make sure he had very comfortable levels of cash, while not wanting to miss out on some opportunities.

He would essentially sign a contract to buy a certain amount of shares, at a certain price, at say 2-5 years from now. His thinking was, if the price of the shares was below the price agreed, he would have been able to buy the shares are a discount to the price he was willing to pay, and therefore the option being burned was not a problem, since he was getting a discount anyway.

But, if the price of the shares was above the price he agreed to pay. This was fantastic, since now he would again be getting a discount!

The essence here is, “The conversion price plus the price of the warrant needs to be the price you would have been willing to pay regardless. And the price of the warrant, must be the price you would have been willing to pay for the value of time or lower”.


The speculative way

There is a fund called Cornwall Capital in the US. This fund was started in 2002 with USD110,000. Before 2007, it had turned that into USD30 million or so. In 2007, it bought a certain number of insurance on CDO’s which returned 80 times, and turned USD30 million into USD110 million.

One of the way they did it, was too look for highly asymmetric investments worldwide, regardless of markets.

For example. The stock of a Korean company is currently USD 50. There is a piece of news, coming out in 3-6 months that will either make it worth nothing, or USD 100. Odds are about 50/50

Call Options on the stock at USD60 (to buy at this price), was selling at USD 4 dollars a share.

The expected value of this trade is

Worst case: Loss of USD 4 – 50% odds. Value is: USD4 X 50% = -USD2

Best Case:  Gain of USD36 – 50% odds. Value is: USD4 X 50% = USD18

Expected value = USD16 or 400% gain over USD4 investment.

Or, for example, I thought that Donald trump was going to be elected, as most of the interactive news online seem to indicate that (Hillary’s post was filled with more angry face than “Likes”, and if they can’t even win online, there’s no way they are winning the rust belts etc. And the vast majority of votes is in coastal cities, but the US is similar to Malaysia, you can get the big votes, but if you don’t win in enough areas, you have nada).

However, the market seem to think that Hillary is definitely winning, and so I through a friend, I had him help me buy a little put options (sell at a certain price) for PESO (Mexican Currency) that is denominated in RMB.

Needless to say, I doubt I can ever beat that trade in my life.

The essence here is: “Find bets or investments where the market have a decidedly very different views from you, with highly asymmetric payoffs due to the levered nature of instruments. A certain fixed timeline or catalyst is preferred. If a catalyst or fixed timeline can’t be found, a long enough timeframe may be enough.”



Criteria’s and valuation warrants in KLSE markets.

So how do we make the above lessons work for us? The one's i can think of is as such.

Let’s begin with the most basic requirements.

  1. The company from whom the warrant is issued, must retain a significant portion of its earnings. If all or most earnings are paid out instead of reinvested, the probability of the stock price increasing would be significantly lower.
  2. The longer the tenure, the better. More than one year is preferred. In bear markets, warrants with 4 year tenure, can be priced as if only a few months is left.

The other criteria’s are

  1. The conversion price plus the price of the warrant needs to be the price you would have been willing to pay regardless. And the price of the warrant, must be the price you would have been willing to pay for the value of time or lower.
  2. Find warrants of companies, whose prospects and future, the market have decidedly different views from you, and thus have severely mispriced them and thus have severely depressed valuations, with warrants being out of the money.


Needless to say, very few warrants meet these criteria. And I can even think of one or two in my current holding that is less than perfect.




Having said so much, I have to concede that this is a topic I’m likely to not be as experienced as many of the grizzled sifu’s here. And am therefore likely to be wrong in parts, or even completely

Kindly correct me if you think I’m wrong, or if you have a very different ways of looking at things.

In addition, tell me about warrants you find interesting after reading this article!



Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com


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  2 people like this.
henry888 Warrants are tricky and most of the times investors get caught. In most cases, warrants are over-priced. As adducing from my experience of observing style of price movements, warrants usually move faster than mother shares. That is how investors might get caught when they buy the warrants when price of mother share dropped and when price of mother share up, price of warrants are not moving and this is particularly so when warrants are going to expire. But advantage of warrants is with small capital, you can invest in a blue chip and conversion at later times when you have enough capital and the price of mother share is worthy to convert. However, i will not prefer those warrants on 'cash settlement' basis and with maturity date in less than a year (so called the called warrants). These called warrants are alike casino type and terms and conditions are in favor of the issuance banks and should not be promoted in Bursa. Note : just my own opinion only without prejudice to relevant parties.
27/10/2018 05:52
lizi If stock also cannot make money, forget about warrant...this is the usual advice i give to people who ask me about warrant.
27/10/2018 07:30
mansaham1972 Bukan saja waran yg menjunam teruk tetapi mother pun semua hancur .skg cuma cari peluang terbaik utk dpt balik untung dgn ambil peluang bila trend waran menaik di lain masa..semua pelabur terbakar skg.
27/10/2018 09:24
Alex™ Btw due to depressed market condition, I now offer rm1k subscription fee only
27/10/2018 09:37
lizi Back to mother share la, mother share can up or not also dont know, how to make money on warrant leh...lol...
27/10/2018 09:45
BankNegaraMalaysia Kasi lu capital control your warrants become trash wakakak
27/10/2018 13:45
probability wei Syed Sadiq wants you all to give free tips on warrants liao.....

if you ask tips you have to pay....but will teach you freely

now i understood why sifu KC always say:

"there is no free lunch in Bursa!"
27/10/2018 14:58
probability only 'free teaching' exist....
27/10/2018 15:09
probability Jon, one suggestion as a topic for your next article.....

try to explain what is your justification for having portfolios with 2% capital on a particular stock?

you have almost 2% on every stock...thats like a portfolio consisting 50 stocks!

and if you have 2% on stock X and 2% on stock Y...does that mean your confidence/knowledge or mismatch between your IV calculated vs Price (safety margins) the same on each?

how do you measure your confidence?
27/10/2018 15:17
Learner King Only pandai tulis...after write so long than admitted ownself dunno anything. As usual stupid choivo... kakaka
27/10/2018 15:19
probability and why 2%....why not 0.5%?
27/10/2018 15:22
newbie911 When u will conaider cut loss? Or will hold until out of value?
27/10/2018 15:30
Choivo Capital Probability,

My number one stock is 33%. Number 2 is 20%. Then a few is 3-10%.

Top 3 is 60% of portfolio.

Those below 3% or 2% or less.

Is those where i think its a good buy, but i'm not as confident, and still thinking, or building up position.

Or one of the great net asset plays. Were i usually buy 1% to start, than average down up to another 2% in stages, say 0.5%, 0.5% etc. Usually i keep a maximum of 2-3% in one individual net asset play, unless its fantastic, than maybe abit more.

There are like 10 or so of them, which make up more than 25% of portfolio.

These days, don't average down so much, because everything is so cheap. Too many other options.

Here is an extract on diversification i really like.


Posted by probability > Oct 27, 2018 03:17 PM | Report Abuse

Jon, one suggestion as a topic for your next article.....

try to explain what is your justification for having portfolios with 2% capital on a particular stock?

you have almost 2% on every stock...thats like a portfolio consisting 50 stocks!

and if you have 2% on stock X and 2% on stock Y...does that mean your confidence/knowledge or mismatch between your IV calculated vs Price (safety margins) the same on each?

how do you measure your confidence?
27/10/2018 15:35
Choivo Capital Depends if you're investing or trading i guess.

Layhong warrant for example, i really like it, so as it falls, ill buy more, but in stages and not more than 3-4% of portfolio.

waiting for 10 or so before i top up i guess.
Posted by newbie911 > Oct 27, 2018 03:30 PM | Report Abuse

When u will conaider cut loss? Or will hold until out of value?
27/10/2018 15:36
Unlevered If a warrant has high premium, does that mean the market expect the mother share to have high probability of going up. My thought on warrants trading at discount is that mother share might be overvalued. What do u think Jon?
27/10/2018 17:14
Bapaklangkau http://www.theedgemarkets.com/article/bnm-governor-wants-option-use-capital-controls-%E2%80%94-ft

Capital control come everything die !
27/10/2018 17:17
Choivo Capital I'm probably just as inexperienced as you, but lets try and learn together.

Alot of it depends on the market sentiment i guess. If its a bull market, it could be that people expect the price of the mother to further go up.

If its a bear market, the mother may have fallen too fast for the warrant to catch up, or the mother have fallen below conversion price.

If there's a discount, chances is its overvalued. But some warrants, if you got the time, you can go and buy it, convert it and sell the shares. The process however takes sometime and cost a certain amount, so, it may not tighten as fast.

But alot of time, if there's a discount, its often because its not within the general radar as well. GAMUDA-WR back in the day fell in that category, before OTB and some others raised attention to it.

Posted by Unlevered > Oct 27, 2018 05:14 PM | Report Abuse

If a warrant has high premium, does that mean the market expect the mother share to have high probability of going up. My thought on warrants trading at discount is that mother share might be overvalued. What do u think Jon?
27/10/2018 17:26
3iii Advice by Benjamin Graham on convertibles

Our general attitude toward new convertible issues is thus a mistrustful one.

We mean here, as in other similar observations, that the investor should look more than twice before he buys them.

After such hostile scrutiny he may find some exceptional offerings that are too good to refuse.

The ideal combination, of course, is a strongly secured convertible, exchangeable for a common stock which itself is attractive, and at a price only slightly higher than the current market.

Every now and then a new offering appears that meets these requirements.

By the nature of the securities markets, however, you are more likely to find such an opportunity in some older issue which has developed into a favorable position rather than in a new flotation.

(If a new issue is a really strong one, it is not likely to have a good conversion privilege.)

Benjamin Graham
The Intelligent Investor
28/10/2018 08:20
3iii Tips for investors in warrants

FIRST, investors should never invest all their investment capital in warrants.

Generally, we do not advise them to invest more than 10 per cent of their total investment capital in warrants due to the high-risk and high-return nature of warrants.

Retirees should also not use retirement funds needed to maintain their lifestyle to invest in warrants, as they generally have a lower risk tolerance.

Investors should also be disciplined about taking profits and cutting losses
28/10/2018 08:28
3iii Warrants versus Stocks

If you are optimistic about a stock, the most direct investment strategy is to buy the stock.

However, some investors may choose to buy a related warrant instead.

Pros: Limited investment amount.

The biggest advantage of warrants is the leverage effect, which allows you to invest with less capital for the same return, as compared with stock trading.

The lower capital required for warrants means that, in case there is a market downturn, the loss will be limited as compared with investing directly in the stock.

In fact, in a number of major setbacks in the past, even giant blue chips fell sharply. Buying warrants instead of stocks can help minimize one's exposure to such market risks.

Cons: Time constraint

Of course, warrants are not without their shortcomings.

It takes a lot of time to understand the factors that may affect warrant prices before one can master the leverage effect to one's advantage.

Investors must get to know that warrants are subject to the time constraint.

The price of a warrant may change along with the implied volatility and dividend payout of its underlying and interest rates.

Even if you get the underlying direction right, you may still fail to reap the expected return.

In case you get it wrong, you should stop the loss.

Never sit on your holdings like a stock investor does to wait for a rebound. The price of a warrant will be dragged down by not only a falling underlying price, but also a declining time value.

Additional notes:

Warrants are derivatives.

They are an alternative investment to their underlying, and vice versa.
Warrants can never be an absolute substitute for their underlying.
Do manage your portfolio flexibly by investing in warrants and/or their underlying in light of the market conditions and outlook, as well as your own risk tolerance.
If one gets the market wrong, one will lose more from warrants (actual loss over investment cost) than from stocks.
That means the leverage effect of warrants is a double-edged sword. (Investors must take caution.)
The investment cost for warrants is lower than that for stocks, but they are more volatile.
Hence, their rate of potential gain or loss is much higher than their underlying.


Warrants are a leveraged investment tool.
Don't foreget that the leverage effect can mean more profit, but also more loss.
So do limit your investment amount in warrants
28/10/2018 08:36
3iii Aeon Credit issued bonds that can be converted to equity in the next few years recently. For those who are looking at this convertible bond, here are some facts to guide your thinking on this investment.

Market price of convertible bonds

The market price of a convertible bond is a
- combination of estimated true current investment value
- plus a premium for the current value of conversion privilege, if any.

This premium varies with
- the estimated opportunity to make a profit,
- the length of time the privilege runs and other factors.

The greatest care must be taken in buying convertible bonds.

The most common mistake is to look too closely into
- the size of the premium or
- the closeness of the conversion price on the bond to the current market for the stock into which it can be converted.

###You should look first into the stock for which it can be exchanged.###
- If you care to make a profit, this must go up.
- You must start by being fundamentally bullish on the equity.
- Only then can you look into the mathematical factors governing the price of the convertible bond.
28/10/2018 13:31
3iii Warrants: Days to Maturity

Warrants can be classified accordingly to the length of their remaining days to maturity.

Short term warrant: Warrant with less than 3 months to maturity
Medium term warrant: Warrants with 3 to 6 months left to maturity
Long term warrant: Warrants with more than 6 months running to maturity.

Whether it is long-term or short-term, ITM or OTM, a warrant is after all a leveraged investment instrument.

Be cautious in funds allocation and stop-loss arrangements.

Do not get carried away by the potential return without considering your risk tolerance.

For example:

A general investor may consider a medium-term warrant with around 3 months running to maturity and a strike price around 5% above or below the underlying price.

More aggressive investors may go for OTM warrants with a shorter maturity.

For conservative investors, they may choose ITM warrants with a longer maturity.

The warrant price tends to be positively related to the length of maturity.

In theory, the longer the maturity, the more room for changes in the underlying price will be.

Given the greater chance for the warrant to be exercised, the warrant price will tend to be higher.

No matter for call warrants or put warrants, the warrant price tends to be positively related to the length of maturity.

Besides, a warrant expiring in 6 months is less affected by time decay than one expiring in 3 months.

Warrants with a longer maturity will see their time values fall slower, while those with a shorter maturity will see their time values fall faster.
28/10/2018 13:38


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