Icon8888 Gossips About Stocks
(Icon) I Hedge My Portfolio With FBMKLCI-HG. Then I Hedge FBMKLCI-HG With FBMKLCI-CN
The continued decline of crude oil price made me nervous. Yesterday I belatedly jumped in to buy FBMKLCI-HG at 27 sen (used to buy before at 18 sen, but sold off with no profit at more or less the same price).
1. Why Buy HG ?
The purpose is to hedge my portofilio.
For discussion sake, let's assume that I have a RM1 million portfolio (RM100,000 is not a good size to demonstrate the magnitude of the problem).
In order to effectively hedge a RM1 million portoflio, I estimated that I need at least 200,000 FBMKLCI-HG (available at 27 sen yesterday).
According to HG's conversion features (667 to 1 and exercise price of RM1,800), every 100 points decline in KLCI index should result in gain of RM15,000 (for every 100,000 HG held).
If I have 200,000 HG, every 100 points drop in Index will give me RM30,000 gain.
But why bother with RM30,000 for a RM1 million portfolio ? That is only 3% of its value !!!
The reason is because I bought HG not for small 100 to 200 points corrections. I bought it for melt down scenario such as 1997 / 1998.
I am not afraid of KLCI Index dropping by 200 points. That kind of decline is a correction, not a crisis. The system will still be functional. I have structured my portfolio to include good quality (in my opinion) stocks with low PER, strong balance sheet and high dividend yield. As long as they continue to announce good quarterly results and declare dividends regularly, they should be able to rise against a 200 points Index decline and deliver me a surplus by end of the year.
The scenario I am trying to hedge against is the 1997 / 1998 scenario whereby the entire financial / economic system went into a seizure. Things spinned put of control, resulting in bankruptcies, bad debts, margin calls, negative economic growth and total financial meltdown.
In 1997 / 1998, the KLCI declined by 900 points from 1,150 to 250 points. If that happens again today, my humble 200,000 HG will deliver me a gain of RM270,000. Plus the RM54,000 my original principal, I will get back RM324,000.
And this RM324,000 is available for reinvestment when KLCI is at 250 level. Jut imagine the impact !!!
Of course, in today's case, the Index might never decline by so much. But you get the general idea.
2. But HG Has Flaws ....
How nice, now I can finally sleep well ?
Unfortunately, things are much more complicated than that.
According to my calculation above, I need to spend RM54,000 to effectively hedge a RM1 million portfolio.
If KLCI reverses its trend (you never know, tomorrow war might break out in the Middle East and oil price moves back to USD80 per barrel), HG might lose its entire value.
We are talking about RM54,000. In Malaysia, you can buy a family car with that. Even though I am comforted by the coverage HG provides me against total wreckage of portfolio, the possibility of losing a family car by end of the year (when HG expires) is now keeping me awake at night.
That was the exact reason why few months ago I was not able to hold on to my HG when it was trading at 18 sen. Every time the KLCI Index strengthens, I can sense butterflies in my stomach (ultimately I succumbed to the fear and liquidated it without making any profit).
And I wasn't just being paranoid. According to my observation so far, THE KLCI INDEX HAS A POSITIVE BIAS. I believe there are big players behind it that want to make sure it stay high. I don't know who they are, it could be ExF, Khaxanxh, Barixxn Naxxoxal, or god knows who.....
By buying put warrants, I am going against big and powerful forces who have the resources and the will power to act against me.
On top of that, HG is now frothy. It is now trading at 31 sen, but according to its conversion features, its fair value now should only be 14 sen (being 1800 - 1707 / 667). The premium of 17 sen is susceptible to turn of sentiment. Without KLCI moving upwards, as long as fear is out of the picture, there is high likelihod HG will revert to its equilibium value of 18 sen to 20 sen.
All these issues are keeping me awake at night.
Until I discover FBMKLCI-CN..........
3. Using CN To Mitigate The Risk Associated With HG
CN has the follwoing conversion features :-
(1) expiring 30 November 2015 (exactly the same as HG !!!). This is considered reaosnable for me for hedging purpose.
(2) market price now 6 sen.
(3) exrcise price RM1800.
(4) coversion ratio 667 : 1.
Based on current price of 6 sen, CN is trading at premium of 7% only (being 0.06 x 667 + 1800 / 1707). I believe 3 to 4 sen is the rock bottom price (time value of money).
Based on gut feeling, I match 2 CN with 1 HG.
For 200,000 units of HG, I bought 400,000 CN.
Based on 6 sen, cost of investment is RM24,000.
With that in place, I am at peace with myself.
Now I no more feel nervous everytime KLCI stabilises or started to strengthen (nor will I be unduly stressed when Index heads south, as HG will kick in to provide protection).
I don't know whether the strategy makes sense or not.
It is a bit convoluted. But it defiitely makes me feel better.
I intend to keep this arrangement in place until November 2015. Beyond that, have to play by ear.
That's all for today. Have a nice day.
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Discussions
5 people like this. Showing 50 of 126 comments
Hedging HG with CN is smart but hedging CN with another put warrant is crazy???
2015-01-07 18:34
@murali
I hedge the HG with the CN. But I left the CN naked, because CN is relatively small (at RM24,000) and I can stomach the loss
Hedge big position don't hedge small position
2015-01-07 18:42
Do u realize the spread u are paying for each cw?do you realize that at 1800 comes Nov, both yr HG n CN may worth zero?
2015-01-07 18:46
murali Just like you go genting u buy rm100 big n rm50 small.....when it opens small u happy u lose rm50 only....if it opens big u happy u make rm50.....
07/01/2015 18:02
murali So the rm50 small is a good hedging for your happiness....
07/01/2015 18:02
murali Big u happy small u also happy
Hahaha. Good one. Happy ending.
2015-01-07 18:49
Seems like the goal now is not make money. The goal now is to not lose a lot money. Very powerful investment strategy.
2015-01-07 18:54
Buying HG at 0.28 now is like paying around 100 points of spread...around 1610
2015-01-07 19:49
Few thousand ? It should be RM30,000 x 2 = RM60,000
Any way, as mentioned in my article (have a you read my article or not ?), I am not bothered by 200 points drop to 1,500. That is a correction, not a meltdown. My export stocks Poh Huat, Lii Hen, etc shouldn't fare too badly (please read my other blog articles)
It is fine if HG doesn't shine at 1500. It doesn't bother me (again, please read my article)
I don't need it to shine at 1500
2015-01-07 19:53
not sure you're understanding these euro style structured put warrants
spend some time reading on investopedia mr grumpy, then try again
sound very newbie-ish mr murali
2015-01-07 19:54
@murali
You are right, buying HG now at 28 sucks
But don't buy even sucks more (heavy storm cloud ahead. I scare mah)
To reduce the suckiness, CN comes in loh.
It is ying and yang, when HG is pricy, CN is cheap
So I am using the yang to offset the ying
2015-01-07 19:57
Icon888, at CI 1500, u make (1800-1500)/ 667= 0.449 minus 0.28 (price today)= RM0.149 X 200,000 = Rm298K from HG, but you lose RM24K from CN, so you still make few thousands...
2015-01-07 20:00
Icon8888, you definitely have a good calculation mindset. I am very impressed with your strategy.
2015-01-07 20:01
@murali
Oil turned positive now (up few cents, recouping all loss ground incurred this afternoon).
If I don't have CN, I will freak out now
But with CN, I Lepak only
2015-01-07 20:02
@murali
-------
Icon888, at CI 1500, u make (1800-1500)/ 667= 0.449 minus 0.28 (price today)= RM0.149 X 200,000 = Rm298K from HG, but you lose RM24K from CN, so you still make few thousands...
-------
Got to factor in the premium mah. Market now give the Put 17 sen premium
So I pro forma add it in loh.
You can complain that I am being aggressive, but it can work out that I am actually being conservative
If people freaked out big time, they will go hysteria and pay big premium
There are many very scared people out there leh, my friend
2015-01-07 20:06
Do you think the Issuer will still give you 100 points spread comes Sep/OCt/Nov??
2015-01-07 20:07
murali Then minus total loss of RM24K from CN, should be gain ard RM9.9K
07/01/2015 20:04
--------
Told you already I not aiming for small gain like this. I am aiming for protection against major crash
Wwwcomment got it after one round reading
Why can't you get it ?
2015-01-07 20:07
I fully understand the purpose of HG, just dont see the logic of using CN to hedge against it only...full stop
2015-01-07 20:08
murali I got to go. Need to bath my cat
Talk to you some other times
Btw, don't stress your mind too much, have a good rest
It has been a confusing day for you, I know
2015-01-07 20:09
okay. its like this,
icon and i go 4 bananna leaf. i take vege. he wants mutton varuval
in a sense i understand why he wants varuval, i enjoy it too,
but today i want vege.
we still eat together. but have different approach to meal...
explained
- i appreciate icon hedging. does not mean i have to buy put warrant
i might
1) buy export orient stock
2) keep 80-100% cash - sit out
3) ignore market turmoil - because i have a 5-10 year timeframe
4) hunt/buy quality O & Gas counters because i'm contrarian with a 3-5 year timeframe and believe oil price will shoot up later
5) get/find FX Broker and trade currency or Metal/Oil CFD's
6) switch to short term time-frame and trade highly liquid penny stocks (1-2 week bias)
etc etc etc.... different strokes 4 different folks
2015-01-07 20:11
I will short KLCI futures if I wanna hedge against my stocks...however, must set a stop loss order lah....period
2015-01-07 20:12
KLCI Futures could be the best option available to hedge the portfolio. It just costs a small amount of trading fees. The problem is how much pressure can we take in this volatile market. I trade both Futures and put warrant that making me more comfortable. Some Put warrants premium are extremely high especially HG, HJ. It doesn't really worthwhile to hedge a portfolio.
2015-01-07 20:12
U can freely eat meat or vegie....just like I dont agree with what Icon8888 is doing and I m just giving my opinion only...but I wouldnt and I cant stop him from doing so....what's the fuss with u?
2015-01-07 20:14
U sounds experienced but just couldnt understand u seems to find Icon8888's way of hedging with HG and then CN makes sense loh
2015-01-07 20:21
myself only hedge one direction (if hedging at all). put/short/down.
why - already long maaa (by virtue of owning shares)
if icon wishes to go both ways. that his call (hence banana leaf story)
BTW - i meant what i say about study the put warrants...
try to read a bit. only scratch surface.
https://www.malaysiawarrants.com.my/tools?sp=dwcalculator&ric=CWKL_ta.KL
2015-01-07 20:29
u can look @ OTB stock selectn 4 2015. already pohuat & homeritz shooting up like mad...now is not the market for bonecythe style picks
money to be made. but need $$$ to buy.
2015-01-07 20:36
erm.. have you included the consideration that if 1997 crisis repeat, maybe the issuer CIMB/Macquarie cannot pay back ?
2015-01-08 08:21
Dear Respected Icon8888,
Mind to teach me one thing? May I know how to paste picture to our blog? I could not do it. How to attach figure or table?
Hope to hear the guidelines from you. Thanks
2015-01-08 19:48
Duit there is a red "upload image" button. You can use that to paste picture
As for table, I do the calculation in excel, copy and then go to the article to paste. A dialog box will come out, you paste (twice) in the box
2015-01-08 19:54
Icon,,, is it must use chrome but cannot use IE or MOZila?
I tried so many times but cannot paste any word or jpeg file.....why?
any idea?
2015-01-08 20:01
Icon8888, thanks for your guideline.
I will try to do it again. Really appreciate it. Hope my IE or Chrome allow me to transfer the pic if not very hard for me to present my compilation.
cheers Icon8888, you helped me a lot.
2015-01-08 20:57
hmm, i simply browse through ur post ony, is this the
"head i win, tail i dun lose much" scenario?
2015-01-08 23:15
The strategy is working
Today passed with flying color
I have a put warrant that insure me against down side and yet it doesn't lose money when the index goes up
This is called have your cake and eat it too
If I have a RM1 million portfolio, I will lose RM4,000 for my HG today, but my CN turned in RM8000 profit
2015-01-08 23:38
good word to say is hedging, but actually is shorting against klci.
Although I oso no look good on bursa, but shorting requires timing other than a good macro view.
Haha, Icon u r so un-Malaysia
Big collapse doesnt hurt me since i hv holding power, if it does happen, simply earn less n hold longer loh.
2015-01-11 16:38
my view is that klci will hv correction, at least 20%, but will nvr hv collapse like 1997, since our ppl nvr borrow margin like in 97, these is only 30% retails particapation in the market.
Since KLCI 30 components except for palm oil mostly represent domestic economy, so it will drops. But small and mid caps will not follow klci, they will go diff way rationally.
Usually export one will rise, import one will drop, so u nid not worry too much of the index
2015-07-22 16:59
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
murali
Why u think that's a crazy idea?
2015-01-07 18:32