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Punting on Maybank call warrants kcchongnz
Maybank and its Structured Warrants
K C Chong
“An investment is simply a gamble in which you’ve managed to tilt the odds in your favor.” Peter Lynch
Maybank target price
Maybank Berhad (MB) is one of the most liquid stocks in Bursa. It is not surprising that it has many analysts and investment banks covering it. Table 1 below shows the target prices from nine (9) investment banks/brokering firm for MB.
Table 1: MB target price
|
Bank |
AMMB |
Kenanga |
RHB |
CIMB |
MIDF |
HLG |
TA |
Alliance |
HDBS |
Average |
|
TP |
9.80 |
11.20 |
11.00 |
12.20 |
11.00 |
11.98 |
12.00 |
11.80 |
11.80 |
11.42 |
|
Date |
31/07/14 |
30/07/14 |
01/07/14 |
10/06/14 |
30/05/14 |
30/05/14 |
13/05/13 |
30/05/14 |
28/02/14 |
|
CIMB provided the most optimistic target price for MB at RM12.20 on 10th June 2014. The lowest target price is RM9.80 as provided by AMMB on 31/7/14. The average target price is RM11.42 as shown in Table 1 above.
MB closed at RM10.06 yesterday with 12.6 m shares traded, or a total value of about RM130m. The upside potential is RM1.36, or 13.5% according to the target price. If we agree with the bullishness of the analysts and investment banks, instead of buying the underlying share which requires a large capital outlay, why don’t we look at the call options of MB?
Maybank Structure Warrants
There are 3 structured call warrants of MB trading in Bursa as shown in Table 2 below.
Table 2: Information for MB call warrants on 28/8/2014
|
Warrant |
Price |
Ex-Price |
Ex-Ratio |
Expiry date |
Premium |
Gearing |
|
C4 |
0.065 |
9.500 |
12.000 |
24/10/2014 |
2.2% |
12.9 |
|
C5 |
0.130 |
9.050 |
9.000 |
29/09/2014 |
1.6% |
8.6 |
|
C6 |
0.105 |
9.800 |
4.000 |
27/02/2015 |
1.6% |
24.0 |
The most interesting call warrant of MB is C6 which closed at 10.5 sen yesterday. It has an exercise price of RM9.80 and a conversion ratio of 4. C6 is expiring on 27/2/2015, or for an option, a long period of another half a year ago. The warrant is hence in-the-money with an intrinsic value of 6.5 sen {(10.06-9.80)/4}. With CA traded at 10.5 sen, it is selling at a small premium of just 1.6%. With a long 6 more months to expiry and a huge gearing of 24 times, it makes punting on C6 very interesting. Why interesting?
Call warrant as a speculating tool
If one intends to invest in 10000 shares in MB, he needs to fork out RM100600 to buy the underlying MB shares. That is quite a big outlay for most retail investors. If MB share price goes up to the target price of RM11.42 in six months time, he would have made a profit of RM1.36 per share, for a total profit of RM13600, or 13.5%, not bad at all.
However if he were to use the same amount of outlay of RM100600 to buy C6, he could buy 960,000 shares of C6 at 10.5 sen. Assuming he holds the C6 until maturity on 27/02/2015 for cash settlement, what are the possible payoffs? Table 3 below illustrates the payoffs for C6 at various share price of MB on date of expiry.
Table 3: Payoff for MB-C6 at maturity on 27/02/2015
|
MB, RM |
9.80 |
10.06 |
10.56 |
11.42 |
12.20 |
|
Cash settle |
0.00 |
62400 |
182400 |
388800 |
576000 |
|
Profit, RM |
-100600 |
-38400 |
81600 |
288000 |
475200 |
|
% Profit |
-100% |
-38% |
81% |
286% |
471% |
On the settlement date, if the price of MB is RM11.42, the average target price as shown in Table 1, C6 will be settled for RM388800 basing on the formula [(960000/4)*(11.42-9.80)]. The total gain is RM288000 (388800-100600), or 286%, 24 times more if compared with investing in the 10000 underlying MB shares at RM10.06 above. In the most optimistic projection by CIMB for MB at RM12.20, punting in C6 will provide a return of 471% at expiry as shown on the last column of Table 3! That is the beauty of leverage. What about the downside?
Let say the share price of MB falls to below the exercise price of RM9.80 per share 6 months later. C6 will expire worthless and your damage is 100% at RM100600. This is so much worse than the drop of underlying share of just 2.6%, or a damage of only RM5600. If however, MB share price stay the same at RM10.06 as today at expiry date of C6, I will still lose 38% shown in Table 3. Haven’t I ever said leverage is a double edged sword? How about consider C6 as a risk management tool?
Call warrant in financial risk management
Instead of hoping to make big money by speculating with the same amount of money of RM100600 to make a 286% gain of RM288000, why not think about making the same absolute return of RM13600 as if you are investing in the underlying MB share but with a much lower outlay of capital?
Go buy 45600 shares of C6 at 10.5 sen with RM4788. In 6 months time when MB share price rises up to the target price of RM11.42, C6 will be cash settled for RM18468. The profit will be RM13680, exactly the same as the same amount you get for investing RM100600 in the mother share, but with a fraction of the capital at risk. The return is 286% as before for C6, instead of 13.5% investing in MB. If C6 expires worthless, that is the most, ie RM4788, you can lose.
But how do we know MB will go up to RM11.42, go down to RM9.80 or other prices 6 months later?
In the random walk theory, the best estimate of next few days’ price of MB is today’s price of RM10.06, and for the price in 6 months time may be a few percent more as share price generally goes up long term. Let say MB share price goes up by 5% to RM10.56 in 6 months time. C6 will be settled off with a 81% gain as shown in Table 3 above. That is still a pretty great return, isn’t that?
Figure 1 below depicts the payoff of C6 with different prices of MB at expiry of C6, together with the other two call warrants of C4 and C5. You can see clearly the more superior return in investing in C6 in comparison with the other two call warrants.
Figure 1
Wait! There is still about 6 months before C6 expires. MB share can fluctuate up and down and C6 will follow suit. I can sell my CA anytime within this 6 months, especially when it is above my cost. Surely there is some time value for C6 which we have not even considered yet.
Black-Scholes Option pricing Model
A couple of smart finance professors (Fisher Black and Myron Scholes) discovered a ingenious mathematical model to price options. With the help of another genius in economics, Robert C. Merton, they uncovered the secrete of pricing of options. They were awarded the Nobel prize for this in the late nineties.
With the underlying share price at RM10.06, historical volatility of MB of 9.1%, time to maturity of 183 days, a dividend yield of 5.3% and the risk free rate of 4%, the Black-Scholes Option Pricing Model gives a theoretical price of C6 at 35.7 sen. This means that the present price of 4 units (10.5 sen each) of C6 of 42 sen is about 17.6% overvalued.
However the implied volatility of C6, by forcing the option price equals to the market price, is not too far away at 11.5%. This implied volatility is undemanding.
Conclusions
C6, with a long expiry period and a high gearing of 24 times, is selling at a reasonable premium in relation to the underlying MB shares whereas most structured warrants of this nature are sold at much higher premiums. Besides almost all analysts have given expected substantial upsides for MB. Hence C6 may offer a good alternative speculative trading opportunity.
Punters are reminded that this is not an even playground for most people, including you and me. However there may be some fun here as long as you take the financial risk management approach as described above.
K C Chong (28th August 2014)
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Discussions
4 people like this. Showing 10 of 10 comments
Maybank C6. Recommendation time 10.5sen. Now 4.5sen Loss 6sen. If follow KCChong advise to invest 960,000shares at 10.5sen, Maybank C6 value will drop to RM43,200 a loss of RM57,600 in less than 2 months. Stock market is not a place for fun(last paragraph), genting casino or gambling is. KC why so quiet on this blog?
2014-10-18 20:53
Posted by truthseeker1 > Oct 18, 2014 08:53 PM | Report Abuse
Maybank C6. Recommendation time 10.5sen. Now 4.5sen Loss 6sen. If follow KCChong advise to invest 960,000shares at 10.5sen, Maybank C6 value will drop to RM43,200 a loss of RM57,600 in less than 2 months. Stock market is not a place for fun(last paragraph), genting casino or gambling is. KC why so quiet on this blog?
Truthseeker? Another new name? I think Troll suits you the most as mentioned by someone before. Take this identity.
How to seek truth when you have been lying and throwing wild accusations instead of contributing something useful in i3investor?
How to seek truth when you have anger and hatred in your head?
How to seek truth when you can't even understand simple English as written in the post?
How to seek truth when you can't grasp the right message in the article which anybody who reads English would be able to? Although of course I don't expect you to understand what a derivative is, and how it works.
How to seek truth when you can't differentiate "Recommendation" and "Discussion of issues"?
How to seek truth when you can't differentiate "Recommendations" and sharing and discussions?
By the way where did you find the word "Recommendation" to buy that call warrant?
Where did you find the phrase "KCChong advise to invest 960,000shares at 10.5sen"?
Finally you did cite something from my article as below:
"Stock market is not a place for fun(last paragraph), genting casino or gambling is"
But why didn't you cite the complete paragraph of mine as below?
"Punters are reminded that this is not an even playground for most people, including you and me. However there may be some fun here as long as you take the financial risk management approach as described above."
What are the true messages behind the complete paragraph? Punters, "not an even playground", "fun". "risk management approach".
Why you so stupid, couldn't understand a thing what i wrote and "invest 960,000shares at 10.5sen on Maybank C6" and lost RM43200, and rant here for some stupid actions of yourself?
Hey, is that the best you can do to try to put me down again? I have written 77 posts in i3investor and posted 4030 comments. Still can't find something, instead of showing your stupidity here?
2014-10-19 04:39
If I hold Maybank C6 until expire, how much my investment still worth? If I need to write long like here and don't make money it is not worth my effort.
2015-03-01 21:55
Posted by truthseeker1 > Mar 1, 2015 09:55 PM | Report Abuse
If I hold Maybank C6 until expire, how much my investment still worth? If I need to write long like here and don't make money it is not worth my effort.
Sorry, you have lost all your RM100600 as your punt has become zero, kosong. I have lost too but just RM4788. I used to lose this type of money sometimes. But now I have shy away from punting in call warrants any more. If anyone asks me about this, I will give this advice.
You can’t blame anyone but yourself for your loss due to the actions of your own. Even if I advised you to buy (I never do that), you still have to take responsibility of yourself. You didn’t read the messages in the article properly too.
The article merely provided you with some knowledge what call warrants are, some lingos, and option pricing knowledge. These are good knowledge if you care to learn. Some good messages were there too as listed for you. They were also in the “Conclusion” of the article.
1) Buying call warrants is a punting endeavour as suggested by the title of this article. Using a few thousand to punt for fun is alright for me, but don’t know about you. Engaging RM100600 in punting is a stupid thing for you to do. Just a reminder to you.
2) Analysts giving the RM11.42 for Maybank were wrong. Didn’t I say before do not depend too much on analysts’ reports. You are stupid to take every report of analysts at face value.
3) Do not always think of how much you will make in the share market, also think of some financial risk management, and how much you could lose.
4) The call warrant market is an uneven playfield. That is why I have quit punting in this market.
Too bad you couldn’t understand a thing about the article. You only got yourself to blame.
2015-03-02 12:36
Example of lemon stocks by KC Chong which is totally gone, only created just 6 moths ago.
2015-03-07 23:01
Posted by kcchongnz > Mar 2, 2015 12:36 PM | Report Abuse X
Sorry, you have lost all your RM100600 as your punt has become zero, kosong. I have lost too but just RM4788. I used to lose this type of money sometimes. But now I have shy away from punting in call warrants any more. If anyone asks me about this, I will give this advice.
You can’t blame anyone but yourself for your loss due to the actions of your own. Even if I advised you to buy (I never do that), you still have to take responsibility of yourself. You didn’t read the messages in the article properly too.
2015-03-08 03:00
Hi kc, based on my broad observations (fundamentals not visited) over the years, bankers would normally issue call warrants when they strongly believe that the mother is reaching its peak, the upside is limited for the next 1 year. I wouldn't want to buy the call warrants that is for sure, and at the same time I would not want to touch the mother for the above reasons.
Plenty of examples to describe the above: AAX, MAS, JTIASA, MUDAJAYA, DSONIC, SKPETRO. I can recall Rhb research house went to Sarawak met with jtiasa management, issued a buy call on Jtiasa soon after, and at the same time issued call warrants.
Of course they are also call warrants that investors make tonnes of money but these are very rare. Examples: POS, HAPSENG
2015-03-08 07:34
Posted by matakuda > Mar 8, 2015 07:34 AM | Report Abuse
Hi kc, based on my broad observations (fundamentals not visited) over the years, bankers would normally issue call warrants when they strongly believe that the mother is reaching its peak, the upside is limited for the next 1 year. I wouldn't want to buy the call warrants that is for sure, and at the same time I would not want to touch the mother for the above reasons.
I think your observation may be right. More of they think there is not much more upside for the underlying share price, especially during the time the euphoria on the underlying share is high.
Actually they can issue call warrant any time. It is just that they will sell to the public at very high implied volatility of the underlying share.
Hence one must understand the game in call warrants, how to value them. Even that the probability of losing is very high.
The play field for call warrant is very uneven here. Issuing houses can somehow easily manipulate them, in my opinion.
Hence I have given up looking at call warrants some time ago.
2015-03-08 08:34
Remember the warrents are always issued at a premium and you already have a disadvantage. The ib will have nominee shares at their disposal and they can always fix the warrent settling price prior to expiry. Same with the index futures, only institution have the means to move the index. Its only when foreign funds ar in contension then the force can balace out.
2015-03-08 08:46
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While, sound good on theory. Just beware price may drop suddenly and substantially on the last 5 days before expiry. And you know why.
2014-08-28 23:46