How to can make money from share market by trading Call Warrants on last few days before expiring?
In Malaysia
What is your risk then?
Assuming you buy at $0.10, but the warrant is worth $0.102 and the cash settlement will be $0.102Mother share is RM5.00
If mother share does not move up or not, you then make 2%.
If the mother share price drop, then the cash settlement may be lower.
If settle at RM0.04, then your loss will be 60%.
If the mother share drop sharply, the maximum loss is RM0.10.
But if the mother share up sharply, then sky will be the limit for your gain. Can be 100%, 200% or more.
Share price may down or up. So we take the average, which is unchanged. If share price unchanged, then you have made the money already.
Call Warrants settlement price "normally" uses volume weighted average, and then average of 5 days. You may buy the call warrant if it got discount on the second or third day. Because it uses average, the last two/three days price fluctuation may not have a big impact on the call warrants settlement price. Therefore, the discount that you get, on a long run, probably is the average that you will get. Although the % is low, but if you can make 3% within a month, then one year will be about 36%.
If you just want to make the discount, without wanting a higher risk/return, then you need to choose call warrants that is with big conversion ratio. Example 10 call warrant to one mother share, means mother share move $0.10, call warrants settlement price move $0.01.
Bigger conversion will be 20 call warrants to one mother share, means mother share move $0.20, then call warrants settlement price move $0.01. This will be less risky.
I first notice about this when it was in 2007.
I cannot recall the exactly the situation and not sure about the year too, but roughly this is what had happened.
There was someone who bought Digi call warrant when it was near expiry, about $0.015. Then next few days, Digi price was up steadily on a low volume. The settlement was many cents higher than the purchase price. He made few hundred percent.
Another scenario was, someone made about 40% from Tenaga call warrant and 3% Maxis call warrant in March 2011.
Some may say 3% is very little. But if 3% in a month, and you repeat it for 6 months, then will be 18%.
RISKS, LIMITATIONS OR DIFFICULTIES:
You need to monitor the expiry and conversion. Need a bit of hard work.
To get a better price of discount, probably you need to que.
If you compute wrongly, then may end up with losses.
You can only trade occasionally because not many call warrant expiry in a month.
OPINION:
Need hard work and computation.
If you are hard working or you have a system to compute real time or up-to-date call warrant settlement price, then you may consider it.
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For more info on 52 Ways of Making Money in Stock Market.
Thanks for the good article written.
ReplyDeleteCould you please review an example how to spot/choose/evaluate a KLSE undervalued warrant to buy after identified it's underlying share has the good potential upside?
would greatly appreciate your input, many thanks.
Andrew @ KL
Dear Andrew
ReplyDeleteIf you know the underlying share has the good potential AND it also got warrent, you can use black scholes model to get the fair value of the warrant. You can google it if you want to know more on black scholes model.
Most people just use Black Scholes Model to get the fair value of the warrant. The disadvatage is, it use volatility, without using the fair value or growth of the underlying share (mother share).
For me, i think the growth/potential of the underlying share is very important.
Once you have identified a good share, you can then use black scholes model, and if the warrant price is lower than the black scholes model fair value, then you can consider buying the warrant.
In malaysia stock market, not easy to find 1)a good stock AND 2)with warrant AND 3)warrant price is cheap. Few years ago, I have done some analysis, but no good warrant. Furthermore, I don't have info on most of the mother share whether it is good or not. Need to do some research. I think i'll do it again.
For your info, buying warrant using mother share + fair value of black scholes model is is one of the ways in my series of 52 Ways. I'll post it later.