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Be a savvy warrant trader |
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Written by Administrator
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Thursday, 12 April 2007 |
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EYE ON WARRANTS: By Butrsa Malaysia
In this last article in our fortnightly series on warrants, we explore trading disciplines that make a savvy warrant trader
He knows both the underlying stock and the warrant: Astute warrant investors and traders watch a few stocks, and pick their warrants from the list. They trade a few warrants in the short term, but never make a portfolio for a medium- or long-term horizon.
EYE ON WARRANTS: By Butrsa Malaysia
In this last article in our fortnightly series on warrants, we explore trading disciplines that make a savvy warrant trader
He knows both the underlying stock and the warrant: Astute warrant investors and traders watch a few stocks, and pick their warrants from the list. They trade a few warrants in the short term, but never make a portfolio for a medium- or long-term horizon.
A good warrant trader does technical analysis on the underlying stocks as part of his homework but will never extrapolate it onto his analysis of warrants. Warrants are constantly influenced by time decay and a chart would need curved trend lines rather than linear ones to take this into account.
A good trader knows the strike price, the effective gearing, time decay, and the Greeks for the warrant. He also follows another axiom – never buy yesterday’s winners. If a warrant doubled up yesterday, chances are that both the smart trader and the issuer would want to focus on another warrant with a higher strike level.
If the price of the underlying share is heading down, do not buy the call warrants, or average down, in anticipation of a turn. A 50% loss requires a 100% gain to get back to the starting point. Never test the lower limit of any structured warrant.
He knows volatility: With several issuers issuing warrants on the same underlying stock, the conventional belief is that investors and traders should look only at the warrant with the lowest implied volatility. But this is only true if the issuer buys back the warrants at a proportionate volatility level.
The key issue that a warrant trader needs to consider when looking at volatility is not necessarily the absolute level of the volatility the warrant is priced at, but rather the level at which the issuer is willing to buy back the warrant.
Buying a call warrant only on a strong upward move after periods of consolidation means the position has skipped a long period of time decay compared to holding the same warrant across the lull period.
He knows the issuer and liquidity: One of the merits of structured warrants is that there is a guaranteed liquid market with the issuer committed to be a buyer at all stages and seller as long as the delta is low. Should all other buyers dry up, a warrant holder would still be able to sell to the issuer at the warrant’s fair value.
Always trade warrants with tight spreads, as opposed to heaviest traded volume. Identify a warrant trade to enter and exit at the issuer’s level, rather than hope that the rest of the market helps to bid it out.
Do not trade a warrant where the underlying share exhibits tendencies to have periodic huge spreads. As long as the underlying stock is liquid, the warrant also will be liquid. This is because issuers hedge their position on the underlying stock – as long as they are able to do this, they can make more warrants available at that same price.
He knows himself: Anything that can move 100% or more in a few days can also lose 90% over the same period.
The golden rule to reducing risk is to always use a cut-loss strategy – invest only a small portion of the entire portfolio in structured warrants.
Do some paper trade before trading warrants with real money. This allows a trader to develop a system without incurring real monetary loss. Construct a fictitious portfolio and trade stocks and warrants using warrants to leverage the portfolio when the timing is right.
Final thoughts: In many markets, structured warrants are viewed as no different to penny stocks. In essence, the same trading principles apply to both shares and warrants. Following the principles in the face of greed and fear is the challenge to overcome to stay in the trading game.
Interested in Bursa Malaysia’s structured warrant prices? Go to: http://www.bursastation.com
source : thestar.com.my |
