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!