Guide to punting on Warrants

So, say you want to get rich or die tryin'. Someone suggested you start buying warrants. 
How do you get started?

The best method is to just buy, and lose money. Then you'll find out why.. kidding! :) 

In this Guide, I'll outline the basic principles and information to look out for when you buy warrants.

Warrant Lifespan
Be mindful that there are 2 types of warrants- company issued, and bank issued. Both have expiry dates, and usually the bank issued warrants have a lifespan of about 12 months of trading, while company issued warrants can vary from 2 to 10 years.

Settlement Method
Company issued warrants upon expiry is usually converted into shares, meaning you might have to pay a fee to convert your warrants to "mother" shares, while bank issued warrants are usually cash settled. If your warrants are "in-the-money", you are paid, and if your warrants are "out-of-the-money", your warrants expire worthless.

Is it a Call or Put warrant?
A Call is a warrant that bets that the price of the Mother share will go up, and a Put is a warrant that bets that the price of the Mother share will go down. Please read the warrant information carefully before executing your trade. 


Only Buy Warrants with the following qualification:

1- Companies that are known
Typically, you should only punt on warrants that are linked to index stocks, or solid blue chip companies. Why? These companies and warrants get more attention than little known companies, and odds of you making money when the market is active is much higher. Thus, even though you share price has not reached your warrant's exercise price, with a little market exuberance, warrants tend to move a lot. That's when you can sell. It's usually a small time window. 

2- Negative Premium
Most stock trading platform has the calculation ready (unless it has just recently being listed) for the warrant's premium. A negative premium warrants indicates that the warrant is trading way below it's actual price. This price inconsistency versus the Mother share usually happens when the warrant is about to expire, or when the market is not so sure about Mother share's potential price movement. There's risk involved, so do your homework first. Always assume the market is typically quite efficient, so any bargain deals could be there for a reason. People just do not want to own it given the amount of risk involved. 

3- Close to Exercise Price
Owning a warrant that is close to its exercise price could be a good play as well. Though usually at a slight premium, any significant move upwards on the price of your call warrant should give you a tidy profit. The market tend to pay a premium for warrants with a lot of trading days left, and have hit its exercise price. 

4- Company share price has upside potential
Buying a warrant that's company has reached say, a recent high might not be such a good idea. It could backfire on you, as investors sell off the share leaving you to hold on to potentially big losses. That said, be sure to always check your charts. 



In the following example, I will demonstrate how to utilize charts, and calculate the "potential profit" for your warrant. 

Exhibit 1: Click to Enlarge

From the exhibit above, it is clear that there's a potential upside possibility for this stock.
Buying warrants of this company can be a potentially good bet. 

Let's say the company stock price is currently trading at RM6.08, and you decided to buy a a warrant that has an exercise price of RM6.20, that has a 3 to 1 conversion, and expires in 70 days. 

Say the warrant is selling at 3.5 sen. You want to find out if it's a good buy, and worthwhile to punt.

I would first see RM6.50 as the immediate target for the share price. But to be on the safe side, I would take a much lower target of say RM6.40. If that is achieved, I would profit 20 sen (RM6.40-RM6.20). 

Since the conversion is 3 to 1, it means that 20 sen should be divided by 3. 
That should value each warrant at 6.5 sen to 7 sen. 


Conclusion: By risking 3.5 sen to gain 7 sen, it could be a potentially good bet. But be mindful that you only have 70 days. You should be reminded that some warrants cease trading in the final few days, and so you might want to think it over. Of course, being able to acquire your warrants at a much lower price than 3.5 sen brings you much more advantage. You should also factor in your "cut-loss" strategy should the warrant be reduced from 3.5 sen to 2 sen if the Mother share price falls. That should mean at least a 50% paper loss. Play intelligently! 

Banks Gambling Bigger to Make More Profits

This came off Reuters:
_________________________________________________________
(Reuters) - Citigroup Inc (C.N) is considering cutting its cash on hand by about $35 billion, which should help the bank buy higher yielding assets or redeem expensive debt to boost earnings.
_________________________________________________________


In periods of mounting distrust for the banking establishment, is it really wise to resort to such a move? Holding more cash should be a better move, but perhaps as investors/speculators are scrutinizing corporate profits closely, they might have little or no choice.


As explained in my previous post, corporate profits should be expected to dwindle in coming quarters, as falling demand as a result of unemployment kicks in. Question is, how long can corporate profits stay high enough to keep stock prices high? Perhaps the elite have already cashed out knowing that the music is about to stop; leaving the fools to play musical chairs.


Personally, I think the prediction that there will be a major shift of wealth from service providers to producers of real goods, will come true. Time to de-leverage your lifestyle, and save up in real assets.

A Brief Review of My Calls

The other day, I made a call to short the EURO/USD pair. If you did, you probably laughed your way to the bank.

I also made a call to buy MRCB. If you bought at RM1.32, and sold at RM1.50 and above, you would have made some quick returns as well. However, there's no harm in holding this share if you entered a little late. Since the share swap deal should be completed in July or earlier, and is done at the price of RM1.55


Moving forward, we all must be weary of the global situation. Companies are be scrutinized for not earning enough profits, and this trend is expected to continue with unemployment skyrocketing in major European and North American economies. If there is no job, there would be no income, and consequently less spending on goods that Asian economies produce.

It is wise to keep a close watch, and only bet on sectors that are intricately linked to basic needs of the population: Energy, Food/Water, Housing
For now, I wouldn't recommend Telecommunications just yet. It is going through a consolidation phase, and trends are worrying especially when Apple Inc is reducing the amount if Iphones being manufactured. 

Potential buys for KLSE can include:

YTL Power 
Puncak
MRCB
Gamuda
E&O 
DRB Hicom

I will keep my call for LONG on SILVER (currently trading at USD28.76), and certainly be on the look out for potentially lower prices. 

So much talk about Bitcoin. What about Litecoin?

Lately Bitcoin has got a lot of coverage from news outlets. It went from trading at USD14 (when I first took notice, but didn't buy) to USD75! So is it a ponzi scheme? Is it a pump and dump scheme? One thing's for sure, there's not much use to it as a currency just yet. Once the acceptance widens, it could be that even at USD75 (US Dollars) it is genuinely undervalued, considering the limited amount of coins circulating in the market. 

I'm not a sucker for investments not backed by any real assets, but pure market trust.

However, what caught my eyes was its competitor (Litecoin) who claims to aim to be the Silver Standard, should Bitcoin be considered the Gold Standard. Currently trading at USD0.56, it is far cry from USD75 ! 

In Malaysia, it ain't that easy to acquire Bitcoins nevertheless! Thus for newbie investors who might want to try and dabble a litte, here are my recommendations.

1.Remember, to first download your bitcoin wallet from Bitcoin.Org. Make sure it is fully synced.  

2.a. Register at MtGox (https://mtgox.com/). You can proceed to fund your account by doing a wire transfer. (Standard wire transfer should cost you RM25 on top of the amount you might want to deposit). Buying and selling Bitcoins can be done at MtGox. 

Screenshot of MtGox.com : Click to Enlarge

OR

2.b. Buy from DgtMkt (https://dgtmkt.com/). It costs a bit more, but is worth it if you just want to buy 1 or 2 coins.

i. Copy your bitcoin wallet address, and remember to use it for your transaction. 

ii. Wait for confirmation, and remember to sync your bitcoin wallet (100%) so that you can see your account balance. 

3. For those more adventurous to capitalize on the undervalued Litecoin, you can proceed to download the wallet from Litecoin.Org

4. Register an account with https://btc-e.com

Screenshot of Btc-e.com: Click to Enlarge 

5. You can proceed to transfer your Bitcoin to your account, and trade in the exchange to get your Litecoins.  (Note that transfer of Bitcoins does involve a small fee. i.e. 1 Bitcoin will cost you 0.0005 Bitcoin. The higher fee you contribute, the faster your approval process)

OPTIONAL

6. Once you get your Litecoins, you could proceed to Google around for exchanges that trade in stocks, bonds, or funds that use Litecoins, OR you could hold on to your Litecoins and hope that it will appreciate in value.

If you should decide to sell your Litecoin, have it converted back to Bitcoin, and offer to sell it back. There is not existing market in Malaysia, so you might want to ask around (DGTMKT does buy back), or have it converted to USD in your MtGox account. I wouldn't worry too much because as this becomes more mainstream, there will be a bigger market. Remember, you are getting in earlier than most people. 

When to pump and when to dump?

So why after major price spikes and crashes happen to companies such as DPS Resources Berhad, Harvest Court Berhad, Asia Media Berhad, and many many more, the latest being Patimas Computers Berhad, do still investors in Malaysia still flock to speculate?

Perhaps its the possible lure of big returns, quick profits and sheer excitement of quick price movements. It used to be that KLSE "those days" traded in volumes much more than today's KLSE. Sometimes even more than NYSE's volume. So if I might take a stab, it could be that investors sometimes feel really bored and are in it for some excitement.

So the question right now is what should you do, when you encounter such exciting prospects? Say at 9.00am on a weekday morning, you suddenly see huge volume for a certain stock, and it suddenly pushes up a few points. Should you join the pump? If so, when do you dump?

My recommendation is of course to limit your speculative bets to what you can afford, and cut it in half. Say you can afford to lose RM5,000 since you had a good month betting on a certain stock, cut your speculative bet to half of that, and make it RM2,500. Also, be sure to enter "early" to such events. If you are too late, when the price has went up far too many points from the previous day's closing price, then you should opt not to participate. If however, you are tempted to, then by all means. 


Once you get in, stay put and watch it closely. You should now choose from the following 2 actions:-

1. Hold it, and wait for it to go up. Since you do not know how high it will go, and what will play out, just hold it, and set the stop loss at your acceptable loss level which should be between 25% and 50%. i.e. Cut loss once your RM0.10 stock goes to RM0.05

OR

2. Hold it and wait for it to go up. Do not cut loss. Only take profit when you feel comfortable or when you think it has all been played out. 


One word of wisdom though, use the price action as your guide. Since news release might come a few days after, your best source of information is the movement of the share price. If you feel uncomfortable, sell it all, and exit. Also, be reminded that the winner will always be the "ones" behind the play. Whether or not you play the fool, is your decision. 

No Light at the End of the Tunnel Seen

Sometimes, no....most of the times, people just put too much faith in their government to sort things out.
As in the case of the Cyprus bank bailout........it shows that often times the people in charge just do not know what to do! While for the past few years there have been a long standing "tradition" of bail-outs, this time they decided to conduct a "bail-in" by taking depositors' money. Now even New Zealand is talking about resorting to the same actions if they would to encounter the same situation. Even the Fed Chairman, Ben Bernanke signalled that if things got out of hand, they wouldn't discount a bail-in.

Anyhow, here are a possible few trades you might be able to do:

1. Buy Precious Metals: Gold and Silver (As I write, Silver has broken through the USD29 level). Let's see if it holds.

2. Shorting the EUR/USD pair might be a good bet, but do so cautiously. 

3. Consider BITCOIN. It has had a spectacular run from when I noticed it at USD14 to USD69 now.
Do more homework about it, find out if it is right for you.


Finally, I would recommend that instead of taking a passive stand in managing your finances, and your assets, take an action stance. Not believing in everything your government does makes you an active, and more responsible citizen. That does not mean you are anti-government. Infact, if I'm the government, I would see you as less of a threat. That's right...being independent minded does not mean you are an anarchist.

Let me describe a situation:

Let's say suddenly there's a bank run situation. Being an active citizen, you might have already withdrawn enough of cash, and might even have some gold or silver. You wouldn't be one of the many trying to to withdraw their money off ATMs, and certainly wouldn't be a security threat to the government. You also might have probably stored enough of supplies, and wouldn't join the mob to the supermart.


Time for change of mindset. Be independent and think for yourself! Don't wait for shit to happen and react.

Deposit Insurance, Is your money really secure?

Have you ever put a thought to your money in the bank? Have you even tuned to the news lately, as Cypriot depositors rush to remove money from their banks, after a call to impose levy on their savings? While one might argue this will not happen in Malaysia, I say let us look at the facts. I'm not implying anything. Just look at the facts.

Extract from PIDM Annual Report 2011
(Link at http://www.pidm.gov.my/downloads/2011/ar2011eng/AR2011Sec5.pdf)

In a brief view, Total Funds available are around about RM500 million.
Assuming maximum coverage is RM250,000 for each account that would only supply enough money for 2,000 accounts. Bank deposits (consumer and corporate) goes into tens of billions for most banks.

Now, tell me whether it is enough? There's no other way except for PIDM to raise more funds through borrowing, meaning government assistance, or possible bail-out. Are you prepared to roll the dice? Will government bail you out when your bank collapses? If you asked me, I would think that this deposit insurance seems underfunded even with "Government Guarantee" as advertised. Similar with the case of many countries. Perhaps the government should do something about this. After all, money is the blood of the economy. This is not a scare article, merely to inform.

Potentially Top Bets (KAF, KENANGA, THHEAVY, MAS, ECOFIRS, MRCB, E&O, DIALOG)

1. KAF could be a good buy, currently valued at almost RM200 million versus Kenanga which is valued at RM406 million. Foreign banks aiming to gain ground on the Malaysian market might aim to acquire a stake in KAF. Currently trading at RM1.65

2. Kenanga could also be a good speculative buy, at only RM0.55, it has ran up and then down. Likely due to election jitters and European/Cyprus woes.

3. More stable buys could include Dialog, E&O, while more adventurous buyers could look at acquiring THHeavy. While MAS could be a speculative bet, considering it is currently trading at cheap, and is open to potential privatization.

4. I also really love ECOFIRS for its potential exposure to Johor real-estate, stable income stream, and also its lucrative venture in Iron Ore mining. This could be a bet for the long term. Again, should be on the lookout for coming financials.

5. As I write, MRCB has fallen to RM1.32, and could present a good buying opportunity. One should watch out its price action carefully, and be reminded that the deal with Gapurna would only be completed in July 2013. Nevertheless it's always better to be 3 months earlier, than 5 minutes too late.

Cyprus Bank Run

So now, bank run in Cyprus? It isn't surprising as if they don't withdraw their money, Cypriots will end up getting taxed for even doing the right thing not many are doing right now.... SAVING.

Will this happen to Malaysia? Can our banks sustain a potential bank run? I have high regard for our Bank Negara nevertheless. Still, as age old advice goes....diversify diversify diversify your assets.

Never assume things won't happen, as panic spreads fast, like fire. Perhaps even faster nowadays.

Potentially Good Buys (Silver, MRCB)

Apologies for not constantly updating.

Right to business

1. Silver is trading below $29/oz. This represents a good buying opportunity. There's a potential that it might fall to $25 as this market is highly volatile and manipulated. Keep some capital to buy lower, but put some to work right now.

2. MRCB could represent a good buy for the next 1 year. But enter at your own risk. Malaysian general elections jitters could drive it lower.

On the high note, Dow is trading at all time high. This market could be heading for a collapse or a boom, thanks to unlimited money printing.