kcchongnz blog
Punting on AirAsia Call warrants kcchongnz
Warning: This post is about the “weapon of mass destruction”. It is written for sharing of knowledge, and not to advocate punting of call warrants, unless for just a little bit of fun with small money.
The share price of AirAsia has been volatile. It was about RM4.00 just slightly over 5 years ago, and it dropped from RM3.00 in end of 2014 to just 87 sen on 24th August 2015, before climbing to RM3.24 a year later on 15th August 2016. It closed at RM2.49 on 25th January 2017 as shown in Figure 1 below.
Figure 1: Share price movement of AirAsia
High volatility in the underlying share, such as that of AirAsia, gives excitement in punting of derivative, a leverage instrument, such as that of call warrants.
There are a huge number of call warrants listed by various investment banks for AirAsia, a total of 15 of them still alive as on today as shown in Table 1 in the Appendix. The table shows the prices of the warrants trading at the close on 25th January 2017, when the underlying share AirAsia closed at RM2.49.
Note that call warrants are issued by investment banks and the have absolutely nothing to do with the companies the call warrants referred to.
Which ones of them should you put your money in if you wish to punt on the directional move of AirAsia share?
Most of the AirAsia call warrants now are trading at zero intrinsic value. That means if the warrants were to expire today, they have no value at all, or out-of-the-money, except for c30, c34, c35 and c49.
But that doesn’t mean those warrants have absolutely no value at all. They have time value, the duration which there is a chance for the underlying share to go up from this point to above the respective exercise price.
Value of warrant = Intrinsic value, IV + time value, TV
Intrinsic value = underlying share price, S – exercise price, X
Warrant is In-the-money, if S > X
Warrant is Out-of-the-money, S < X
The longer the time to expiry of the call warrant, the higher the volatility, the higher will be the time value, as it gives the warrant a better chance to be in-the-money, i.e. S>X. The higher the gearing the warrant provides, everything remains the same, the warrant should sell at higher premium, as a lower outlay gives a potential higher return.
Gearing = underlying share price / (warrant price*exercise ratio)
Premium = (warrant price * exercise ratio + exercise price)/underlying share price
Take for example, c42, c43 and c44 have the same expiry date, c44 is trading at the highest premium at 35.7% as it has the highest gearing at 8.3 times, and c42 the lowest premium at 26.1% as it has the lowest gearing at 6.2 times.
c30, at the close of 46 sen, is trading at smallest premium of 0.4%, as it has only 3 more trading days to go before expiring at the end of this month. It also has the smallest gearing at 2.7 times. Note it can be dangerous to punt c30 even though the premium is low, as it has just three days to expiry and trading will halt tomorrow.
c40, although has slightly one more month to go, has a high premium of 37.7%, simply due to its high gearing of 19.5 times. The longest expiry date warrant, c47, has a relatively lower premium of 21.9% because its gearing is not as high at 5.7 times.
In this article, we ignore the effective gearing, which is more relevant to the pricing of call warrants, but harder to grasp for most people.
Effective gearing = delta * gearing
Delta = movement of warrants/movement of underlying share
The settlement price will depend on the 5 days’ volume weighted price of the underlying share, AirAsia, before the warrants expire.
Settlement price = Sw – X* Exercise ratio
Which warrant is a better punt depends on individual risk profile. Figure 2 below and Table 2 in the appendix shows the payoff for some of the more actively traded AirAsia warrants, at expiry in relation to the underlying share prices.
If the underlying share price stays at RM2.49, all punters of the call warrants of AirAsia buying those warrants at the price now will lose money, with the loss for c30 the least at 1.1% with a gearing of 2.7, as it is trading at a small premium. c39, c40, c46 and c47 would have total loss. c40, with a higher premium, will still have total loss even if the underlying share goes up to RM3.00. However, if AirAsia share price can go up to RM4.00 before c40 expires in a month’s time, it can make an outsized return of 447%. However, the chance for AirAsia share to go up by 61% in a month’s time, is too tall an order.
From Figure 1 above, it can be seen that c39, with expiry on 17th March 2017, presents a better punt than c40 as the payoff is always above that of c40 when AirAsia share price is below RM4.00.
Those who wish to have a little longer time than c30 can look at c34 and c35 with longer time to expiry and at higher gearing at 5 times. c34 and c35 both trading at 17 sen now have the exactly same premium of 0.8% and gearing of 4.9 times. c34 is clearly a more superior punt as it has a slightly longer expiry time of 11 days more, and hence a higher time value, although their intrinsic value is exactly the same at 16.3 sen.
If AirAsia share price can go up by 12.4% from RM2.49 to RM2.80 within a month’s time, which is not impossible in view of its high volatility, punters of c34 can gain 57%, 5 times more than the gain of its underlying share due to its gearing.
For those who wish to have more time and think that AirAsia share price will make a big move within the next 9 months may want to choose c47 which expires in 9 months’ time. If the underlying share can go up to RM4.00, or by 60%, c47 offers exaggerated gain of more than 220%. As the time to expiry is longer, there is higher probability for the share price of AirAsia to go higher.
K C Chong
Appendix
Table 1: AirAsia Call warrants listed in Bursa
Table 2
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Discussions
1 person likes this. Showing 29 of 29 comments
how much premium for how much gearing and time? I don't care. The one with the highest volume gets my vote.
2017-01-26 03:06
Nope
Should follow KC method of buying based on gearing and premium
You will know the difference when they start moving - some are more sexy some are boring
I am a regular Call Warrants punter, i am basing what I say on my own experience
2017-01-26 03:50
1. If it has 20% premium, that means it will lag about 20% over time.
2. If your point of entry is risky, its better to buy longer maturity one. If you really know what you are doing, then you should buy the ones with the lowest premium because it also bring you the highest return.
3. If you really know what you are doing, there is no risk. Risk is just a concept. The end result is either 0, or 1.
2017-01-26 03:55
eh bomb topic sikit, normally how long is the process for warrants exercising to ord share? 1 week? 2 weeks?
2017-01-26 07:40
.
On the flip side... is it easy for an IB to make a loss on the call warrant it has managed to sell?
.
2017-01-26 08:21
icon
let the market decide for you what is the trade off between premium, gearing and time value....its a huge mess I don't have to decide...its where the action is.......
2017-01-26 08:54
Stockman, your method the most practical and down to earth. Forget those complicated and complex formula which in the end might just work on theory only, on paper only. Wht we want: put money, take money = simple and neat. Win or Loss = your vision and swiftness matters most
2017-01-26 08:57
The Greeks are important but you must be very careful that in a small market like Bursa, some calls or puts may be cornered. Once you are in, you are up against the issuing investment bank.
2017-01-26 09:31
Posted by limml > Jan 26, 2017 09:31 AM | Report Abuse
The Greeks are important but you must be very careful that in a small market like Bursa, some calls or puts may be cornered. Once you are in, you are up against the issuing investment bank.
You are absolutely right. It is a highly uneven play field.
2017-01-26 11:20
investment banks are not dumb, there is a reason why they issue call warrants instead of buying them. statistics have shown that 95% of the time call/put warrants expire out of money, which means if you made good profit, sell and not greedy and hold until expiry. fast in fast out
2017-01-26 12:47
when they sell call warrants, investment banks are not afraid that price will go up, but only if price goes up beyond a certain level, which means a margin of safety for them.
and recently I think one bank got fined for manipulation of share price to make sure the call warrants expire out-of-money. one got caught, but I would think that such practice is prevalent in the industry, so just be mindful what you are up against
2017-01-26 12:55
Posted by stockmanmy > Jan 26, 2017 03:06 AM | Report Abuse
how much premium for how much gearing and time? I don't care. The one with the highest volume gets my vote.
Posted by Icon8888 > Jan 26, 2017 03:50 AM | Report Abuse
Nope
Should follow KC method of buying based on gearing and premium
You will know the difference when they start moving - some are more sexy some are boring
I am a regular Call Warrants punter, i am basing what I say on my own experience
WHICH METHOD YOU FOLLOW WILL LIKELY MAKE YOU MONEY PUNTING CALL WARRANTS? FOR ME,IT IS CRYSTAL CLEAR.
BUT ONE THING SO SURE, MOST PEOPLE FOLLOW THE FORMER, MAY BE 90%. THAT IS WHY THE OUTCOME FOR THOSE WHO PUNT CALL WARRANTS FOLLOW THE BELOW.
Posted by Jay > Jan 26, 2017 12:47 PM | Report Abuse
investment banks are not dumb, there is a reason why they issue call warrants instead of buying them. statistics have shown that 95% of the time call/put warrants expire out of money
2017-01-26 12:57
Buy/sell CW are pure are pure punting, a game of bacarat where players try to read trends and probability. In CWs premium, tenure and possible stocks prices driving events are my simple guide. Volume assists for entry and exit. Fools would hold for expiry like investing FVI in stocks ?
2017-01-26 15:06
C49 is having the most potential as the gearing is low and expiry date is still far.
2017-01-26 16:57
Posted by DONGFANG > Jan 26, 2017 03:54 PM | Report Abuse
Why AAC38 alone is missing from the table? Just curious as i all in C38
I have included c38 in Table 1. As c39 is trading at a smaller premium and higher gearing, c39 has a better risk and return profile than c38 as shown in amended Figure 1 in the article.
It means it was better to punt on c39 than c38 at those prices then.
2017-01-26 23:07
Agreed C39 has less premium + higher gearing than C38. But its liquitity is too low, almost no volume and need to buy from warrant issuer with higher price in sell queue. Furthermore, its expired date is 1.5 months shorter than C38, it is indeed very risky with such premium when only one months plus left.
2017-01-27 00:12
Simple General analysis for call warrants
Never pay more than 1 to 3% premium for every month of time value especially as it nears its expiry date.
If gearing is less than 2 don't bother
If not much trading volume don't bother unless you play small.
Warning!
Due to small amount of Warrants usually issued, IB and Buayas knows who is buying, selling and holding
IB and insiders is there trading to screw you
Definitely not for geenhorns!
Most call warrant now are overvalued if you follow my guidelines
Kong Hee Fatt Choy everybody
2017-01-27 09:48
Posted by lcwin > Jan 27, 2017 09:48 AM | Report Abuse
Simple General analysis for call warrants
Never pay more than 1 to 3% premium for every month of time value especially as it nears its expiry date.
If gearing is less than 2 don't bother
If not much trading volume don't bother unless you play small.
Warning!
Due to small amount of Warrants usually issued, IB and Buayas knows who is buying, selling and holding
IB and insiders is there trading to screw you
Definitely not for geenhorns!
Most call warrant now are overvalued if you follow my guidelines
Excellent advice.
2017-01-27 11:55
KC
You started this call warrant page and ended with excellent advise is to avoid.
Man is you ghost also you.
Tell you what.....if anybody wants to punt call warrant ., just punt the highest volume one.
Test your skill, results and feed backs very fast one.
2017-01-28 13:10
Volume high means there's lots of interest in the trade offs between premium, gearing and time and is the fair value between premium, gearing and time.
Up or down depends on the mother.
2017-01-28 13:16
learnt that buy call war when bullish and put war when bearish! now mkt bearish, y buy call?
2017-01-28 13:16
Very very rare instance of arbitrage and mispricings that can take advantage of.
So can save all the effort and ignore things like premium, gearing and time and just punt high volume ones.
2017-01-28 13:19
The only thing you need to know is that the big boys issue such stuffs.
For you to win, the big boys have to lose money.
God bless you.
Posted by musangfoxking > Jan 28, 2017 01:16 PM | Report Abuse
learnt that buy call war when bullish and put war when bearish! now mkt bearish, y buy call?
2017-01-28 13:22
Posted by stockmanmy > Jan 28, 2017 01:10 PM | Report Abuse
KC
You started this call warrant page and ended with excellent advise is to avoid.
Man is you ghost also you.
I started this thread with this remark,
"Warning: This post is about the “weapon of mass destruction”. It is written for sharing of knowledge, and not to advocate punting of call warrants, unless for just a little bit of fun with small money."
I went on to explain what one should look for if he punts on call warrants.
And you rightfully mentioned that I, "ended with excellent advise is to avoid.
So what do you mean by "Man is you ghost also you."?
2017-01-28 21:21
Posted by musangfoxking > Jan 28, 2017 01:16 PM | Report Abuse
learnt that buy call war when bullish and put war when bearish! now mkt bearish, y buy call?
Is the market bearish?
We punt the call warrant of a stock, not the overall market anyway.
If the stock is bearish, or at low price, it may be the best time to punt on its call warrant, as the call warrant, of which the value is derived from the mother share, will be low too. When mean reversion takes place, stock price will recover, and as well as the call warrants. And that is when you make money. Of course it depends on whether the share price recovers fast enough before the expiry date of the call warrants.
2017-01-28 21:59
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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....
stockmanmy
rightly or wrongly, when I want to trade call warrants, I will just trade the one with the most volume for the following reasons...1. I am too lazy to go through the list 2. make or lose, I want it to be because of the trend, not because of execution leakage. Liquidity is number one. 3. I want to be where the action, not sitting alone trying to sell my call warrant after I bought, when all the customers are some where else.
3 days average volume would be a good inclusion in the table.
2017-01-26 02:51