Saturday, 24 January 2015

How to choose a call warrant?

The last time I wrote about call warrant fundamentals was years ago, see CW Fundamentals 1, CW Fundamentals 2, CW Fundamentals 3 for details . Words couldn't describe how fast time flies. Today I am going to write about how I determine which CW to buy.

Make sure you do some homework before buying call warrants. Every one knows it is of high risk. Before choosing CW, I choose mother share. First, mother share must have strong fundamentals, making profits. E.g., I will not buy KNM call warrants. Second, mother share has potential upside. By only having the right mother share, you can expect to have a positive return, because call warrants follow mother share movement.

Lazy people like me will go to i3investor to have a glimpse of all structured warrants available for a particular stock. It contains useful information about warrants listed in a form of table. For example, if I am looking at MYEG CW, search for MYEG, then go to warrants drop down menu. Easy.

MYEG Call Warrant
(Figure print-screened from i3investor)

How to decide which one to go for? For me, I look at the following preference in order.

1. Expiry. No long expiry date no talk. This is so important. Preferably at least six months. Under special conditions (e.g. negative premium, high gearing etc, will consider 3-6 months. Under any condition, I will not touch CW with less than 3 months expiry)

2.1 Premium & gearing. Low premium and high gearing are preferred.

2.2 In my opinion, volume has the same importance as premium and gearing. Liquidity is important (without "so" as in expiry). First, it ensures that the CWs are easy to buy and sell. Second, the buy-sell spread is small if it is traded actively, good for us.

3. Issuer. CIMB always has the "best valued" call warrants. Recently I see that Macquarie releases a lot of structured warrants in KLSE. Isn't this the Macquarie Group, the largest investment group in Australia?

OK. By looking at the first priority, CB, CC, CE and CF are out of consideration. Then, CD has the lowest premium, which is the best among itself, CG and CH (I look at premium more than gearing). But if you look at the graph of MYEG-CD:


Listed for 6 months, it is traded for less than 20 days. Clearly, I will not buy this kind of CW. You will find it hard to buy and sell. So, we are left with CG and CH.

CH has a longer expiry date, a lower premium and s higher gearing than CG. CH is also traded more actively than CG. So the choice is clear. Actually, given its low premium, CF is a good choice too. But it is expired in 4 months. So, I would go for the safer choice with longer expiry date.

Next thing to do? Prepare money, find a target buying price and queue. For call warrant, I will be very particular, even a price bid of 0.005 difference matters to me, because it is bought in quantity.

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