Icon8888 Gossips About Stocks
(Icon) Am I Insane To Buy FBMKLCI-CU At This Time ?
1. Introduction
On 20 August 2015, I wrote that I bought a small amount of FBMKLCI-CU at 2 sen per unit :-
(a) expiring on 31 March 2016 (7 more months to go);
(b) strike price of 1,849; and
(c) conversion ratio of 1,000 to 1
Based on KLCI now at 1,609, conversion premium is (1,000 x 0.02 + 1,849) / 1,609 = 16.2%.
This afternoon, a forum member asked me why I bought FBMKLCI-CU instead of Put Warrants, since index is going down ?
I am happy to explain through this article.
2. High Risk High Return
As shown in the chart below, since May 2015, the Index has dropped from approximately 1,879 to lowest of 1,504 last week.
Pursuant to the correction, value started to emerge for many stocks. As an investor / trader, I feel the impulse to move in and bottom fish.
But has the market bottomed ? To be honest, I have absolutely no idea.
Many stocks had come down, but the potential return that they offer does not yet justify the risk.
Take Hovid as an example, it has declined to 42 sen.
With this kind of market sentiment, it probably will not go anywhere.
My guess is that if Index goes back to 1,800, it probably will go back to 50 sen, a return of approximately 20%.
If I invest RM100,000, I will gain RM20,000. But my RM100,000 would have been tied down. If the market continue on its downward trend, I would have run out of bullets to fire at Mr Bear.
However, if I spend RM10,000, I can buy 500,000 FBMKLCI-CU at 2 sen.
If the Index goes back to 1,800, I think some daredevils will buy them from me at let's say 6 sen.
I would have gained RM20,000. The return is same as Hovid, but achieved through a much smaller amount of capital.
In this time of uncertainty, preservation of capital is important for me.
Of course, I could potentially loss my entire RM10,000 if the Index continues to drop, especially as we move closer to expiry date.
But to totally wipe out my capital, the Index has to drop quite drastically over the next 7 months.
If that happens, I would have opportunity to pick up some Hovid at let's say, 37 sen.
It might not be able to completely offset my FBMKLCI-CU losses, but you get the idea.
3. Conspiracy Theory
I believe many readers had never traded KLCI Futures before. But I have done that before.
To hedge against downside risk associated with a particular event, I shorted the Future (similar concept as buying a FBMKLCI Put Warrant, but with unlimited downside risk, should things work against you).
That period of trading gave me invaluable insight into the world of Futures.
It was spooky.
I could feel the presence of an Invisible Hand. It was always ahead of the spot market.
For example, in a particular day, sentiment was so bad that everybody was shorting the Future. But last few minutes before closing, an aggressive buyer will emerge and started Longing big time. The next day, against all odds, the Index will go up (during that period, the Top Dogs were always Petronas Dagangan and Petronas Gas). Of course, the Invisible Hand will be the big winner.
It happened so many times that I am fully convinced that there was no coincidence. Somebody always knows what he is doing. He is in full control.
For the Invisible Hand, the Futures market is a gigantic ATM machine.
Of course, this is only possible because the Index is made up of 30 stocks, the majority of which are tightly held.
My theory is that E Fund and P Fund might have a role in it. Nobody will be able to pull off such a trick without the acquiescence of these two entities, which have unlimited amount of stocks to offload and upset the scheme.
What is the implication ?
If my theory is correct, then the recent dramatic drop of the Index (by 375 points) would have provided the Invisible Hand with fertile ground for windfall gain.
The Invisible Hand will not fight the Index stocks sell off, it will let it happen. The worse the better, because that would give it abundant opportunities to Long the Futures and build up a gigantic position.
When the (foreign) selling finally exhausted and at the right timing (usually year end would be the ideal time to harvest, as that will allow them to properly close their books, the so called "window dressing"), the Invisible Hand will make its move. The Index stocks will go up gradually, funded by windfall gain from Longing the Future.
The best part is that all these can be achieved without the need to come up with a single sen of own funds, the "Shorters" provided it.
Of course, this is just a conspiracy theory. Many things could happen between now and year end and disrupt the scheme (if there is indeed such a scheme).
But for a punter like me, the opportunity to participate in such a mega drama is simply irresistible. I have to be part of it.
That is why I bought into FBMKLCI-CU.
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Discussions
6 people like this. Showing 36 of 36 comments
wah Icon...now your writing style also very professional already - scary like KC's ;)
2015-09-02 01:29
I'm afraid so. You're entirely bonkers. But I'll tell you a secret. All the best people are.
2015-09-02 03:34
MAY DAY.
MAY DAY.
MAY DAY.
BETTER STAY AWAY.
HOW TO OCCUPY YOURSELVES?
JOIN WWW.MINDREALITY.COM
2015-09-02 06:09
i believe you can say goodbye to your money, Dow Jones tumbled 450points overnight
2015-09-02 07:25
Sorry Icon , the volume is too small - for me i would prefer CV & CY .
Just for your info , i have place almost each of CW - you just name it , the winning for me is less than 10% - almost 90% making big lost .
Duit san is always an expect in CW .
2015-09-02 07:47
If you really understand about the current economy, you will not buy in call warrant. I believe the previous index lowest point on last month is not the lowest yet.
2015-09-02 08:14
RicheHo, spending RM1 million to buy call warrants is evidence that somebody doesn't understand the current state of the economy.
Spending RM10,000 is a different story.
2015-09-02 09:01
this article inching towards a speculation and made up story than fact.no invisible hand,more like trader/institution try market timing and bought large volume and believe the market reach bottom.
100 stocks made up klci?cannot be typo error from your side,more like writing for the sake of writing.
2015-09-02 18:26
Icon obviously was overdosed from substance abuse or was in the midst of a wild party when he wrote all these imaginative stuff.
Few of the major error on his thesis.
1. Epf kazanah never involved in futures. None has futures accts.
2. Klci is made up of 30 stocks. Not 100 stocks.
3. Numerous bad experience in futures trade only proved that you r not cut out to trade futures. Not some spooky hidden hand behind.
4. Futures is a place to hedge stock position. At least it is what the intention. Its not design for novice or nobrain to speculate.
Its like running vs walking. Icon. U barely know how to walk u want particpate in marathon n expect to win?
Many more .....
2015-09-02 18:46
growthinvestor thanks for highlighting that FBMKLCI not made up of 100 stocks.
I have done some googling, should be 30 stocks.
I have amended the article accordingly
2015-09-02 18:58
I don't see the index going to 1850 in 7 months. Personally, with this market,I prefer to buy individual stock call warrants rather than any of the KLCI CWs, especially those with strike level of 1800 and above.
By the way, the index need not drop drastically for you to lose your capital. Even if it goes up 200 points, you will still lose your capital.
2015-09-02 19:17
The futures pro r specialist n they spend all their time only monitoring spot vs futures n mkt emotion of fear vs greed.
It explain when u sell they ady buying. U sell when u feel extreme fear seeing mkt melt. They sold when they detected the beginning of fear spreading out. So u start shorting when they covering their short and awaits next round.
Its a different animal. N its not liquid.
2015-09-02 19:21
Hi...If you really want to buy call, why not consider FBMKLCI-C11 and c12 ? They are trading at 5% and 2% premium with more than 170 days to expiry. It is better than your 17% premium .....
2015-09-04 15:40
Icon, i try to summarize ur point:
The black hand behind the veil will let klci keep dropping and lend its contracts as much as possible to shortseller.
Then during the last trading session of the future contract probably year end, the black hand will get into the equity market and pump up KLCI, then the shortseller will burn their hands then the black hand will get back their own contracts.
and u bought CU bcoz it has the highest gearing ratio compare with other warrants with the same expiry date
Am i right?
2015-09-04 19:41
not sure lah
I think u better don't follow me
Better buy some proper stocks with good FA
2015-09-04 19:52
errr your theory is not what I meant in the article
My aeticke said invisible hand will king the futures gradually when index declines
By year end window dressing, those futures will make money if index goes up pursuant to window dressing
Ya I biught CU for high gearing
2015-09-05 06:24
Do you buy C12 ? up from 0.15 to 0.195 today. Still the cheapest in terms of premium and duration....
2015-09-07 12:43
Yes, I bought C12 at 14.5
Please go Fbmklci-H1 to check my 10.36 am comment, ha ha
2015-09-07 17:15
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