Warrant Trading A Costly Lesson Learnt & Still Learning

My warrant trading experience...

Warrants provide a relatively cheaper way to participate in the share price movements of the underlying assets. A typical warrant is just a small fraction of the price of the underlying share and is geared at a few times such that the movement in the underlying share is magnified in terms of percentage.

My first warrant trading started in year 1998, having traded in warrants (e.g. Mplex) issued by share trading in CLOB to those issued by SGX blue-chip companies like CDL, OUB & Keppel Corp and mid-cap Guthrie. My trading results had been very poor, making small money out of some trades while losing big time for CDL, KepCorp etc. I quitted trading in warrant in year 2001 and sold all my warrant holdings in 2002 being disillusioned with the mediocre prospects of earning money from it. I lost a whopping S$5,712.22 during this period.

On 27 Jul 2007, lurked by the greed of making quick bucks by following the ShareOwl investment moves, I bought into the structured warrants of China Milk. I had never done any detailed study on this company but yet I pumped up 20 lots @0.095 with a short term punt in mind, thinking that Prof Chong's move into buying the main share can't be wrong and many followers were likely to buy into the mother share, just like he did. But alas, I got out from this warrant @ 0.06 1 week later with a loss of $728 due to the very bad sentimental surround the financial markets and the intense pressure I felt by holding such warrant. It was a bad experience, and having experience that 10 years before, why did I still punt??

I have joined the ShareOwl online investment committee. I was very impressed with the savvy investment strategy of Prof Chong, who invests across different regions and take advantage of market timing in the ups & downs. He has made several successful trades in warrant that made me very envied.

Subsequently, I moved into STI warrants, making small profit in the first trade but losing 50% of capital in the second one. Haiiii.....

Yet again, I got into DBS warrant yesterday.

I'm down on warrant trades, but should I get out??

Despite all the losses I'm suffering, I have not learnt to trade successfully. I believe there is money to be made, but I need to take a discipline approach and follow a well-planned strategy.

Warrant Strategy

When deciding to buy a warrant, the key decision should lie in the fundamentals of the underlying shares and the expected share price movement in the short-term. Yes, it's short-term because warrant has a short life-span and the price decay factor will eat away the price day-by-day. Hence, probably technical readings of the price chart and the short-term market sentiment may be important.

When to buy warrant???
- When many indicators point to over-sold or over-bought conditions. Indicators may be technical charts, recent broker's report.
- To hedge exisiting position after very strong price movement but wish to maintain that position.

How to select?
Safest route - call option
- pick a strong company that share price dropped for no justifiable reason other than the general market conditions
- many broker reports suggests much higher fair value.

Criteria:
1. At least 2 brokers issued buy reports for the company, fair value set at minimum of 25% above current market price.

2. Share price of underlying share price dropped by more than 5% from recent high (2 weeks) or 8% (1 month high), suggesting a imminent rebound of at least 3% within 1-2 weeks.

3. Check using warrant calcucator that by rebouncing 3% in the underlying share, warrant price should increase by 15% (i.e. gearing of min 5 times)
http://sg.warrants.com/singapore/en/home.cgi

4. Warrant premium should not be more than 12%.

5. Daily Theta(%) should be less than 0.8%

6. Option expiry date should be at least 2.5 months away

7. Daily warrant trading volume must be liquid

8. Must be comfortable to hold for at least 1 month, with return still positive when price rebound 3%

9. Must exit if target not hit by 1.5 months before price decay accelerates

I will try out this strategy and refine it along the way. If positive result is still not achieved within 6 months, i.e. by May08, I WILL stop warrant trading!.