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Ride The Bull Short The Bear
CS Tan
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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....
Posted by kcchongnz > 2012-12-21 09:54 | Report Abuse
There are three company warrants issued by WCT. The exercise price, expiry date and the current price of each warrant is listed in Table 1 below, along with their intrinsic value and the respective premium/discount, implied volatility and gearing to the warrants: Table 1 Warrant Price Ex-Price Exp date Intrinsic value Premium Imvol Gearing Wb 0.365 1.85 22/04/2013 0.530 -6.9% NA 6.5 Wc 0.425 2.04 10/03/2016 0.340 3.6% 14.4% 5.6 Wd 0.325 2.25 11/12/2017 0.130 8.2% 12.9% 7.3 WCT at RM2.38 on 20th December 2012 If one is bullish about the company WCT in particular and the market in general, warrants may offer a better alternative way of investing/trading than the underlying share. But just which warrant should one choose as a better play? It actually depends on individuals. The best warrant to choose from is one with the lowest premium, the longest expiry date and the highest leverage. However all these favourable criteria don’t come together as you can see from Table 1 above. All the warrants above are in-the-money with positive intrinsic values. Wb is of the best value trading at a discount of 6.9% and with a gearing and effective leverage of 6.5. This is a rare scenario as I would expect WCT share holders would sell off their shares and buy warrants. They will gain riskless arbitrage profits straightaway. This action would drive down the WCT shares price but bid up the Wb price. The just listed Wd has the longest expiry date of 5 years and gearing of 7.3 and a lower implied volatility of 12.9%. However, Wc is traded at a lower premium of 3.6% compared to that of 8.2% for Wd. So just which warrant is the best to buy? For me I will choose Wb as although it is the shortest time to expiry. I could buy Wb now at 36.5 sen, convert to WCT in a couple of weeks time and sell the converted WCT shares in the market at RM2.38 (hopefully the price of WCT doesn’t change much then), and make a profit of 16.5 sen [2.38-(1.85+0.365)] or 45%, in two weeks! Some other people may choose the longer duration warrants Wc or Wd. Kenanga Investment Bank has recently put a target price of WCT at RM3.17. It is unlikely that WCT can rise by 34% up to this target price before the expiry date of Wb in 4 months time. However, for Wc and Wd with 3 to 5 years to go, it is possible. The following Table 2 shows the gain/loss of each warrant with different prices of WCT: Table 2 WCT 1.85 2.20 2.38 2.50 2.70 3.00 3.20 3.50 WCT -22% -8% 0% 5% 13% 26% 34% 47% Wb -100% -4% 45% 78% 133% 215% 270% 352% Wc -100% -62% -20% 8% 55% 126% 173% 244% Wd -100% -100% -60% -23% 38% 131% 192% 285% WCT at RM2.38 on 20th December 2012 The table shows that if WCT goes up to closed to the target price of 3.20, Wd, bought at today’s price of 32.5 sen can gain 192% if converted to the underlying share and sell into the market. This is higher than the 173% achieved by Wc. However at lower price of WCT, say below 3.00, Wc provides better return than Wd as shown in the table. Hence for those who are risk averse, Wb presents a safer bet. And for those risk takers, may be Wd is a more exciting bet.