Call warrant trading strategies

WHEN and how does one decide to buy call warrants?

BUYING CALL warrants (CWs) is a leveraged alternative to a position in the underlying stock. Increasing leverage or gearing can result in large percentage profits because purchasing CWs generally requires a lower upfront capital commitment compared with an outright purchase of the underlying stock. Buying CWs also offer the investor a pre-determined maximum risk. So, when and how does one decide to buy CWs?

1. Timing, level

CWs' value is mainly derived from the value of the underlying stock. So, first things first; study the price movement of the underlying stock before deciding when to put in your buy order.

A good time to buy CWs is when you think the underlying stock is about to make a sharp gain within a short time-frame. It is at this point of time where the gearing or leverage effect of CWs comes into full play. So, study the charts, digest the news and research, and try to find such stocks.

2. Compare similar warrants

Once the decision on the underlying stock has been made, it is time to compare the different warrants available. There will be warrants on the same underlying with different maturity periods, different strike or exercise prices to match your expectations. Also take note of the premium and expiry date of each warrant when deciding when to go in.

For example choose the lowest premium and the warrant with longest maturity date. Because usually this kind of warrant will be most sensitive to the mother. Other things to look out for is the warrant price, the gap of the market makers que and the ren qi(volume) of a warrant.

You should also study a warrant's historical volatility (a measure of price fluctuation of the underlying asset over time) and implied volatility (market expectation on the future price fluctuation of the underlying asset) for a buy signal.

You could compare implied volatility of a warrant with warrants of similar effective gearing, exercise price and expiry over the same underlying asset before deciding whether that warrant is expensive. Higher implied volatility means a higher warrant price. Your aim may be to choose a warrant with the lowest implied volatility among warrants with similar terms and underlying assets. There are websites such as [You must be registered and logged in to see this link.] which provide free calculators to make this comparison.

Another strategy could be buying CWs if you expect an upward trend in the historical volatility of the underlying stock. Be mindful, however, that a higher potential for return could also mean a higher risk of loss. Remember that warrants are for trading, not investing.

3. Compare issuers

In Malaysia, structured warrant issuers either act as market makers themselves or appoint one market maker for each warrant issued. A good market maker ensures sufficient liquidity in the particular warrant by continuously providing competitive buy and sell quotes, making it easier for investors to trade. By doing so, the market maker also ensures price stability on the warrant price.

It is important to choose a warrant issuer that offers good market- making service

Market maker can determine win and losses. Depending on their que so it is very important to understand the nature of a market maker. Different banks/issuers have different market making strategy. For newbies avoid OSK market makers as OSK is known to trap many unsuspecting victim.

4. Setting take-profit, stop-loss and time frame

Warrant traders need to adopt a different approach from trading ordinary shares. Indeed, one's trading time horizon and risk appetite could determine whether one should be trading warrants or shares.

A share has an infinite life whereas a warrant has a limited lifespan. As a warrant-holder, you should regularly monitor your warrant's position, at least on a daily/hourly basis. In addition, warrant traders need to do the following:

1. Set a take-profit target

watch movement of the mom. If mother share keep going up let the profit run. If mother share make a U turn sell it immediately or take profit. Apply WYSIWYG(means seeing how the mother moves and situation)

2. Set a stop-loss level

if the mother share go down to a certain level, cut lost immediately and buy back lower. It is better to cut lost quick and buy back lower rather than holding it and hope it can back to your buy level.

Let me give some examples:

· Buy and hold even when mother share goes down. I buy warrant A at 30cent, when the mother share go down I refuse to sell knowing it is a good fundamental company. So warrant drop from 30cent to 20cent and come back to 31cent in 8 months time. I make 1 cent from holding for 8 months

· Cut lost and buy back lower. I bought warrant A at 30cent. When mother share drop I cut lost at 28cent knowing I can buy back lower. When warrant drop to 20cent, I bought it back and let it rebound. in short, when I cut lost I make a lost of 2cent. But I bought back at 20cent and let it run to 31 cent. So instead of making one cent I make 9cent with this strategy.

· Remember many warrant might never go back to your ordinary price even if you buy and hold

· The time and capital you spend holding a warrant can cost you many good opportunities you spotted in the market.

Four Golden Rules

1. Never be emotionally attached to your position. Cut your losses instead of irrationally holding on to a losing position.

2. Take profit or cut lost according to mom.

3. Always be flexible while setting target. Change target profit if mother share keep going up.

4. Buying more to average down is never a good idea. It will only expose you to more risks. However it depends on situation. Average down is strictly not for someone new in the stock market!!!

PS

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Call warrant trading strategies

Call warrant trading strategies

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