KLSE warrants

Trading warrants on KLSE

Warrants

Basically 2 main types of warrants that are popular with general retail traders:-

·         Company issued warrants

·         Institution issued warrants

Warrants are derivatives of mother stock and quite popular instruments in Asian markets like Hong Kong and Malaysia.

1.     A warrant is a transferable option certificate issued by a company which entitles the holder to buy a specific number of shares in that company at a specific price (or exercise price) at a specific time in the future. It is normally issued by the listed company.

2.     A call warrant (like a call option) also gives investors a right to buy stocks in a company within a fixed period of time. However, call warrants are issued by investment banks.

3.     There are many risks in buying into call warrants. Call warrants have shorter maturity period as compared to warrants. Normally, warrants have maturity period of five years or more whereas call warrants have very short maturity period of less than a year.

4.     Call warrants will be automatically exercised upon the maturity date if the settlement price is higher than the exercise price.

5.     A lot of call warrants are not actively traded in the market. In fact, a majority of them do not have trading volume on a daily basis.

6.     The prices of call warrants are influenced by their intrinsic value and time value.

7.      If the call warrants are getting nearer to their maturity date, the time value will be closer to zero. In addition, if the mother price of the listed companies is being traded at a lower price than the exercise price plus the premium that the investors have paid for the call warrant, the market price of these call warrants will fall below their original issue price. Trading volumes may be very low for some of these call warrants getting nearer to maturity date. Unfortunately, in many instances, investors get nothing upon maturity of these call warrants if their mother price fall below the exercise price.

8.     Majority of the call warrants are European-styled, which means investors cannot exercise them before the maturity date.

  

Genting call warrant chart

This call warrant CU of Genting (casino & resort group) that will expire on 27 September 2011 with exercise price of $10.00 against the underlying share price of $10.06 (at time of capture on 12 August 2011). Notice that the warrant price now has only a small intrinsic value and very little time value left. Also, the trading volume is so insignificant.

Warrants are derivatives of stocks so DO NOT BUY & HOLD. Trade them for short term gains only.
Since most call warrants have one year maturity periods, I suggest the trades should be not over the first 6 months. After the call warrants are traded more than 6 months, it is not encouraged to continue and one should ignore this instrument.

Concept of Company warrant

A company warrant is a derivative issued by the Mother company, like KFC-WB is issued by the mother company KFC to let investor to buy the mother stock at a later date before expiry.  

Company warrant is often issued during stock split, dividend distribution, or bonus entitlement.

Warrant premium is a measure of how much an investor is paying more to purchase the company warrant as compared to same unit amount of mother share at the current/latest price.

e.g.

mother share closing price = 2.72

warrant exercise price = 2.50

warrant closing price = 0.595

premium formula: warrant price plus exercise price less mother share price over mother share  price

premium % = (0.595 + 2.50 – 2.72)/2.72 = 0.375/2.72 = 13.79% 

Company warrant is guaranteed by the Mother company for any kind of redemptions that it announces, i.e. cash, conversion to mother shares, or bonus, after a certain number of years.

Differences between Warrant and Call Warrants are as below:-

	Warrants	Call Warrants
Maturity Date	Longer(up to 10 years)	Shorter(up to 2 years)
Issued Company	The Company itself	Third Parties

These 2 product must be exercised on or before the maturity date, if not it will expire and becomes worthless. 

Remember!

 Warrants are derivatives of shares and have maturity periods and may expire worthless. Warrants are not shares and therefore not entitled to dividends. Trade warrants have great risks and if you are not familiar, you may end up with substantial losses.

For further information and statistics, go to Bursa website: http://www.bursamalaysia.com/market/securities/equities/market-statistics/

Download the Excel file for more information on FGV newly listed call warrants. http://www.mediafire.com/view/?rf2dlhrxc5wxc2e

cardinal rule 5: trade the trend and long the uptrend or short the down trend - never counter trend

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