kcchongnz blog
Punting of AirAsia call warrants: Part 2 kcchongnz
Punting like the above can be fun, but,
“Derivatives are financial weapons of mass destruction.” -Warren Buffett
Each time I talk about call warrants, I always quote what Warren Buffett said on the above. This is because it is dangerous and unethical to promote something like punting to the generally innocent and naïve public, just like promoting margin finance to the innocents. My purpose writing about this aims at sharing what I know about punting of call warrants, and for those still insist in doing so.
A couple of months ago, I share this “Punting of AirAsia call warrants” in i3investor in the link below:
http://klse.i3investor.com/blogs/kcchongnz/114719.jsp
I shared what one should look out for when dealing with derivatives such as call warrants: Premium/discount, intrinsic value, time value, gearing and effective gearing, volatility, money-ness etc. I shared a list of AirAsia call warrants and discussed on all these terms. I even discussed which are the preferred call warrants to punt on, preference basing on lower premium, lower implied volatility, higher gearing, longer time to expiry etc.
I received a comment as below which was repeated many times in the comment section of the thread.
[Posted by stockmanmy > Jan 26, 2017 02:51 AM | Report Abuse 
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.
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.......]
These comments were echoed a couple of times too as below:
[Posted by SALAM > Jan 26, 2017 08:57 AM | Report Abuse
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 ]
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 ?]
Table 1 in the Appendix shows the details of the call warrants; their prices, gearing, premiums etc. The share price of the underlying share AirAsia has steadily rose by 14.5% from the date of the article was written, to RM2.85 two months later on 26th March 2017. That is some lucky factor that the underlying share price has gone up. But then that was what we were betting for, weren’t we?
Since then, 5 call warrants, C30, C34, C35, C39 and C40 have expired. Table 2 in the appendix shows the returns of those call warrants two months later.
C30, with exercise price of RM1.58, expired a few days later in-the-money with the 5-days weighted average price of RM2.4773. Holders of C30 lost money due to the dip in share price of AirAsia by 0.5% the last few days. However, the loss was minimal at -2.5%as it was traded at a slight discount, but a gearing of 2.7 times then.
Compared C40 and C39, I commented that
[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.]
C40, with a premium of 36.6% then, had little chance for the underlying share to go up by 36.6% in order for it to breakeven at expiry. C40 expired worthless at the expiry date of 28th February 2017 when it expires when the underlying share price was RM2.732, well below its exercise price of RM3.30. Punters of C40 incurred 100% loss. That is the peril of punting of call warrants, it is a double-edged sword.
C39, on the other hand, with a lower exercise price and premium of 14.7% then, expired on 17th March 2017 with a settlement gain of 2.2% when the underlying share went up to a 5-days weighted average of RM2.8838.
One can see C39 was having a lower exercise price, lower premium, and longer expiry date then C40. The relative outcomes of these two call warrants did turnout as expected.
I made another comparison between C34 and C35 as below,
[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.]
C35, with an exercise price of RM2.00, was trading at 0 premium and with a good gearing of 4.9 times then. It expires on 17th February 2017 in-the-money when the 5-days weighted average price of AirAsia before the expiry date was RM2.6385. The total settlement gain for C35 at expiry was 25.2% while the underlying share gained only 6%.
That shows the power of punting with low premium and gearing in call warrants.
C34, with exactly the same profile as C35, but just differed with a longer expiry date on 28th February 2017, as expected, fared better with a total return of 43.5%, in just two months, while the underlying share went up by 9.7% to RM2.7316. In fact, punters of C34 could have made more during the longer time by selling off C34 when AirAsia share price spiked up to more than RM2.90 before expiry.
That is the power of longer time to expiry, with higher time value for the call warrants, besides the low premium and high gearing.
So, is it better to look at premium, gearing, time value, intrinsic value, or just trade the one with the highest volume as propagated by Stockmanny?
Is better outcome of punting call warrants from trend, or his famous apa-itu “pivotal moment”?
So, are those holding call warrants to expiry when the underlying share continues to go up, fools, as alleged by Salam?
I am sure you can make a good judgment.
I also made another statement as below:
[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.]
C47 made a gain of 17.2% so far. Not bad for two months. But it is not as good as some other call warrants so far. Well, there is still a long time to go before C47 expires on 31st October 2017. We will see.
Table 3 in the appendix shows the profiles of some existing call warrants listed in Bursa. There are two new call warrants; C50 and C51.
A final note, again I highly discourage anyone who knows nothing about derivatives to punt on call warrants. this article is written, just for fun.
For those who have some good knowledge may, I said may, be able to make some fast money, and with some fun too, with the edge they have punting in call warrants. But more importantly, they can guard against the pitfalls in punting in call warrants.
Evaluating derivatives and option pricing is also part of my teaching curriculum.
K C Chong (ckc13invest@gmail.com)
Appendix
Table 1: Price and profile of AirAsia call warrants on 26th January 2017
Table 2: Return of call warrants on 26th March 2017
Table 3: Existing call warrants as on 26th March 2017
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Discussions
3 people like this. Showing 50 of 92 comments
Posted by Blacksails > Mar 29, 2017 06:45 PM | Report Abuse
KC Chong, What is your opinion on Maybank-C24? Would you say call warrants are used by seasoned traders/ investors as an "insurance cover" in certain cases, if you know what I mean.
Writing, or selling an option, or call warrant is more for investment banks here, not traders/investors like those markets with matured option market.
The writer of options would have the underlying shares for those "covered warrants".
2017-03-30 00:04
Posted by Blacksails > Mar 29, 2017 08:46 PM | Report Abuse
If I'm not wrong, the first covered warrants were issued by PNB, and they were all blue clip counters. Believed PNB made a big loss in the end.
If PNB had hedged, or covered those written call warrants, they shouldn't be losing big.
They appeared to become speculators rather than as hedgers.
2017-03-30 00:06
Fake accountant claimed to be better than fake accountants? Stockmanmy, you are making fun of yourself. What a JOKE of the day.
Posted by stockmanmy > Mar 29, 2017 06:35 PM | Report Abuse
kc, I am certainly better than those who spread fake news and accuse others of being fake accountants.
2017-03-30 02:17
Wrong. Choose your Warrants wisely as per KC. Otherwise your CW will be like old man tak boleh naik (due to high premium and low gearing)
Trading Volume is secondary. My Airasia C27 rose from 21 sen to 67 sen but all this while thinly traded
Don't believe me ? Go check the chart
manmy always think he very intelligent and made sweeping statement . He can bluff others, but cannot bluff old dogs like me and KC
Posted by stockmanmy > Mar 27, 2017 05:29 PM | Report Abuse
buying the c with the largest volume has a lot of advantages, the most important is that it will response quickly to market conditions..you do not want to buy a c that is half dead and shows no response.
2017-03-30 07:09
The correct way to choose is a combination of (1) low premium (2) high gearing and (3) long expiry
If you see something like the above, can whack big. The chance of profit is good
Volume totally irrelevant
2017-03-30 07:17
My latest exposure is C47. Cost 12 sen
But I bought not much. Only one twentieth of my mother share exposure. Instead I punt big on mother shares. The percentage return lower, but I can punt real big. You can't do that for Call Warrants. It is madness to put 40% (lets say) of your portfolio in an instrument that will expire in few months
2017-03-30 07:20
I would also like to take the opportunity to touch on the topic of sailang promoted by manmy. No body really sailang by betting big big on a particular stock. The process is gradual. You starts small, and as more info trickle in and things seemed to evolve in positive direction , you scale up your exposure (sometime drastically)
When visibility is really really good and risk very favorable, you execute the final "sailang" jump
That is the way it is done in real life
2017-03-30 07:53
There is nothing wrong with call warrants
You sprinkle it on your portfolio like you add spice to cooking. (Nobody cook and eat a whole pot of spice)
It will make your food super extra delicious
For example : Affin at 2.20 is cheap but not entirely sexy. But if you come up with some money to add some Affin CW to your exposure (let's say 10% of mother share value), the whole picture changes
Affin went up to 2.80 only recently but CW has gone from 11 sen to 70 sen+
So the return becomes very attractive
Posted by insulter > Mar 28, 2017 10:53 AM | Report Abuse
it is not a right thing to teach retail call warrant... most of the people lose until underwear lose...
2017-03-30 08:14
whack your head
so happens Air Asia up recently .
How many call warrants have expired worthless?
Icon8888 > Mar 30, 2017 07:17 AM | Report Abuse
The correct way to choose is a combination of (1) low premium (2) high gearing and (3) long expiry
If you see something like the above, can whack big. The chance of profit is good
Volume totally irrelevant
2017-03-30 08:55
if you had bought the highest volume call warrant at the same time, you will not made any less in percentage and absolute terms....go check.
highest volume means that is the fairest with the most buyers and sellers at the relevant time.
2017-03-30 09:01
Well you might have your points, but so do KC and I
That is all I want to say
2017-03-30 09:08
Icon, your education is always very good... may i know on low premium selection, how do you judge low premium? Do you set a target like below 10% or 20% or 30% is ok?
2017-03-30 09:31
low premium means it is going to expire soon....simple as that.
forget about premiums, just buy those with the highest volume. At least you have plenty of smarter people with you.
wiki123 > Mar 30, 2017 09:31 AM | Report Abuse
Icon, your education is always very good... may i know on low premium selection, how do you judge low premium? Do you set a target like below 10% or 20% or 30% is ok?
2017-03-30 09:36
icon
the theory of gearing and premium is not very sound.
Gamuda W and Genting W has high gearing but low premiums and long periods....and stays like that forever.
A better theory is penny warrants.....penny warrants always has very high premiums and next to zero gearing and way way out of money.
2017-03-30 09:42
you are focusing on the wrong thing.
The reason I participant in this thread is to say......precisely this...that people like you are focusing on the wrong thing.
wiki123 > Mar 30, 2017 09:31 AM | Report Abuse
Icon, your education is always very good... may i know on low premium selection, how do you judge low premium? Do you set a target like below 10% or 20% or 30% is ok?
2017-03-30 09:52
Manmy, i dont think this is relevant to company issued warrants. Even more so for penny warrants. Structured warrants and company warrants behave very differently. Co warrants practically mirrors the mother share whereas SWs has the speculative element in them.
Premiums and gearing are just risk management mechanisms in place to reduce speculative risk in selecting SWs.
Posted by stockmanmy > Mar 30, 2017 09:42 AM | Report Abuse
icon
the theory of gearing and premium is not very sound.
Gamuda W and Genting W has high gearing but low premiums and long periods....and stays like that forever.
A better theory is penny warrants.....penny warrants always has very high premiums and next to zero gearing and way way out of money.
2017-03-30 10:12
and to illustrate your point of why Co warrants have almost zero premium, at least 95% of them
2017-03-30 10:14
whatever focus on which call warrant, make big money is most important, ready to change my 14 years old car .cheers...\(^o^)/
2017-03-30 10:17
This, you got it wrong.
v
Gearing or leverage....means how many times u get to borrow loh....!!
If the gearing is 10x....means if u put 10%...u can borrow 90% using warrant as a means of funding....instead of borrowing from the bank loh.......!!
2017-03-30 10:22
Gearing in warrants refers to sensitivity between warrant price and mother share.
High gearing can be both good and bad. e.g. 1 cent (mother) to 1 cent (warrant) move, or 3.5 cents (M) to 1 cent (W) move
2017-03-30 10:26
wiki, as a rule of thumb, for normal warrants with lets say 2 years life, I prefer premium lerss than 25%
for call warrants, prefer zero to 5% premium
if you want to buy high premium CW, you need to be careful of IB issuing additional new Warrants (all of them have the right to do so, you know ? just check any of the CW term sheet, it is a standard term). Anytime IB issue additional new call warrants, the existing Call Warrants will experience dramatic premium evaporation as people has the impression that the IB is going to dump the new warrants on them (which is not the case. It is a long story, sigh). If your premium is low, your CW will not be affected. If your premium is high, you can kiss goodbye to your money as you can expect the premium to disappear overnight
Posted by wiki123 > Mar 30, 2017 09:31 AM | Report Abuse
Icon, your education is always very good... may i know on low premium selection, how do you judge low premium? Do you set a target like below 10% or 20% or 30% is ok?
2017-03-30 10:27
HIgher gearing indicates the Warrant is more sensitive to mother share movements.
2017-03-30 10:27
Yes it mean sensitivity also loh...but on crude ways....for layman..it means how many time can borrow loh....!!
A high leverage means....very sensitive loh.....bcos borrowing alot mah......!!
2017-03-30 10:29
Bros & sis here, Would you give EG-wc a punt ? It is now at a merely 13% @$0.520
45 months to expiry. Consider getting less as it is in the semicon field.
2017-03-30 10:38
Ex -right , will be self adjusted to apprx $0.430 + a 1 for 4 existing warrant.
I hv drop a summary in it's thread.
2017-03-30 10:40
Just focus on the mother share movements and buy the highest volume warrants if you want more andrenaline......nothing else matters.
2017-03-30 11:11
KC Chong, About a decade has past since PNB first issued those covered warrants in Bursa. Do you think the current issuers like IBs hedged all their call warrants?
2017-03-30 12:10
PNB made a big loss on Maxis cover warrants then as it didn't anticipated Maxis price went very high and PNB started hedging late.
2017-03-30 12:14
Just focus on the mother share movements and buy the highest volume warrants if you want more andrenaline......nothing else matters.
The market will decide for you what is the appropriate combination of term, premium , gearing and beta fluctuations.
It is not for you to decide.
2017-03-30 12:20
Air Asia, they give you many CW to choose.
Is this real choice or Hobson's choice?
You think you are so smart you can choose the one cW that will make you money while the rest will lose you money?
is that arrogance, ignorance or stupidity?
it is just marketing gimmick to suck you in.....like a supermarket with many choices of cigarettes.
I think a little knowledge is a dangerous thing.
your task is not to choose the one CW that will make you money. Your task is to read the Air Asia trend correctly.
2017-03-30 14:17
Posted by Blacksails > Mar 30, 2017 12:10 PM | Report Abuse
KC Chong, About a decade has past since PNB first issued those covered warrants in Bursa. Do you think the current issuers like IBs hedged all their call warrants?
If IBs do not have the underlying share before issuing those call warrants, those warrants are "naked" warrants, not termed as "covered" warrants.
If IB has the underlying shares before writing those call warrants, then the rise/fall of the underlying shares/warrants do not matter that much, as warrant price moves in tandem with the underlying shares. The loss in warrants is compensated with the rise of the underlying shares it possesses, and if the hedging is done correctly.
2017-03-30 15:21
Posted by stockmanmy > Mar 30, 2017 11:11 AM | Report Abuse
Just focus on the mother share movements and buy the highest volume warrants if you want more andrenaline......nothing else matters.
Posted by stockmanmy > Mar 30, 2017 02:17 PM | Report Abuse
Air Asia, they give you many CW to choose.
Is this real choice or Hobson's choice?
You think you are so smart you can choose the one cW that will make you money while the rest will lose you money?
is that arrogance, ignorance or stupidity?
it is just marketing gimmick to suck you in.....like a supermarket with many choices of cigarettes.
I think a little knowledge is a dangerous thing.
your task is not to choose the one CW that will make you money. Your task is to read the Air Asia trend correctly.
This article has shown you, with numbers, that precisely by choosing the call warrants with low premium, high gearing yields you the best returns such as C34, +43.5%, C35 at +25.2%, against C40, the highest volume? that incurred total loss.
So please show your records, with numbers on the statement as claimed by you, to justify that you are not "arrogance, ignorance or stupidity.
2017-03-30 16:04
kc
you mislead people
You compile a table of warrants and profit and loss at expiry dates.
of course, there will be some in the money, some out of money at expiry date because all of them were issued with different terms.......
you have shown nothing meaningful.
2017-03-30 16:38
so I now know, finally I now know KC.....talking nice, is in reality a very misleading guy.
2017-03-30 16:41
why don't you say c34 and c35 are the ones with the highest volume?
you cheat and you know you cheat.
2017-03-30 16:56
Posted by stockmanmy > Mar 30, 2017 04:38 PM | Report Abuse
kc
you mislead people
You compile a table of warrants and profit and loss at expiry dates.
of course, there will be some in the money, some out of money at expiry date because all of them were issued with different terms.......
you have shown nothing meaningful.
I misleading people? where and how?
Table 1 in this article clearly shows that C34 and C35 with zero premiums, expire with cash settlement of a gain of 43.5% and 25.2% respectively after two months as shown in table 2.
Table 1 also shows C40 with a premium of 36.6% two months earlier, and with the same expiry date as C34, expires with total loss as shown in Table 2.
Isn't that very clear a call warrant with low premium with a better outcome at expiry?
Volume was never talked about volume in the article. It was not that relevant for me.
You are the one who say again and again and again that the call warrant with the highest volume is the best. So, show us, which warrant has the highest volume and has it got a better outcome?
Shows numbers, evidence, proof etc, and not simply bark!
2017-03-30 18:47
ok, I withdraw my comments.
You did not cheat.
I did some tests today. The market is not as efficient as I thought.
2017-03-30 19:39
call warrants are killing the market.
shares have great difficulties going up when so many call warrants are issued.
ban call warrants.
2017-03-31 10:16
KYY asked me where is his dog? I replied him how do I know? He is so free until now barking everywhere everyday in i3
2017-03-31 11:03
Every time I see stockmanmy, it will remind me of a song: Who lets the dog out?
2017-03-31 11:04
In an efficient market , it should be indifferent whether it is c1, c2, c3 or c4.
Its an interplay between low premiums, high gearings and long periods.
Depends what you want.
In an inefficient market, sometimes you can have lower premiums even for different call warrants with the same period and gearing even for the same stock.
2017-04-01 21:26
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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....
Blacksails
blue chips counters like Maxis, Tenaga and Maybank.
2017-03-29 21:03