Before you choose an index warrant you should first look at the nature and performance of the INDEX FUTURES and take a view. If you think the index futures is going to go up, buy a call index warrant. If you are bearish, buy a put index warrant.

FYI, today FBMKLCI closed -6.31 points. However, most of the put warrants did badly. HW dropped 13.68%, HV dropped 14.89% and HK dropped 13.04%! So, what is the reason behind? Again, I want to emphasize that price of index warrant is not affected by index itself, it depends on index futures.

You may refer my previous post "Put Warrants - Knowledge And Tricks" for more information.

http://klse.i3investor.com/blogs/rhinvest/82584.jsp

During market closed today, FBMKLCI futures (Sep 2015) was breakeven at the level of 1,560. It lowest level is 1,538.50 while highest level is 1,564.50. This is the reason why most of the index warrants were once at a very high price today.

After the market closed today, FBMKLCI futures dropped 1 point to 1,559. So, tomorrow the index warrant might open slightly higher than today closing price. 

Today, I would like to explain some warrant terms by using FBMKLCI-C12 as illustration. If you notice the price changes today, you will wonder why this index call warrants performed better compared to others. Why its volume is so huge?

Current FBMKLCI futures (Sep 2015) = 1,559.00

This is some of the information about FBMKLCI-C12. If you compared with others 26 call warrants, you will found that FBMKLCI-C12 is the only call warrant which is in-the-money. In-the-money means the current index futures level exceeded the exercise level of warrants and you will get back cash settlement amount by end of expiry date. Normally, in-the-money warrants are more able to attract investors.

Expiry date will be another concern. It is very important because as the expiry date of the index warrant is getting closer, the risk is getting higher. Until a certain period, let’s say 1.5 months to the expiry date, if the warrant is still out of money, people normally will not bid for this warrant anymore. At that time, you will not be able to sell off your warrant and end up become a valueless paper. You will loss all your capital in this investment. For example: FBMKLCI-CP and FBMKLCI-CO. As for FBMKLCI-C12, it still has 6 more months before it expired.

Effective gearing ratio is the best ratio to tell you the effective exposure. For FBMKLCI-C12, an effective gearing ratio of 7.57 times means a 1% movement in the futures translates into an approximate 7.57% movement in the warrant. The higher the effective gearing, the greater your exposure and the greater your potential returns. However, if the market goes against you, your losses will also be higher. Therefore, decide the level of gearing you are comfortable with.

Lastly will be the premium of an index warrant. To calculate the premium, you need find out the cash settlement and then compare with the index warrant price that you bought. The difference between cash settlement and your index warrant price is called premium. The cash settlement amount is calculated as below:

Example: FBMKLCI-C12

Cash settlement amount – MYR0.06

FBMKLCI-C1 price – MYR0.185

Difference = MYR0.125 / 67.57% premium

Generally, premiums are higher for longer-dated warrants. They are also higher for warrants with higher effective gearing levels.

Besides than this four, the factors that can take into consideration are delta, exercise ratio, warrant sensitivity and implied volatility. However, I am not going to talk further as it will be a long topic.

You may refer to https://www.malaysiawarrants.com.my/tools?sp=dwsearch for all the details of index warrants, including delta, gearing ratio, effective gearing ratio, etc.