These 2 charts of BIMB and its call warrant BIMB-CC show the percentage of movements between the mother stock and its warrant. Usually the difference is about 5 times. Take a look at the 2 charts.
During the middle of Mar'12, BIMB pulled back about 7% but the warrant CC pulled back 34%.
Again, when BIMB rebound by end of Mar'12 it reached almost a 3% gain but the warrant CC hit over 17% gain.
Trading call warrants can be profitable except that you are ill prepared to exit whenever mother share pull back even a little bit. There are a few criteria to fulfill:-
1. Ensure that there is volume for the warrant you wish to trade. Sometimes, the mother stock can have a substantial number of warrants listed.
2. Warrants have time decay and call warrants are usually 1 year life so choose the one that still has at least 6 months life.
3. Prefer to pick the one warrant that is discounted - that strike (or exercise) price is below mother share price. Premium should still be reasonably low.
4. Mother stock prefer up trending strong fundamental stock.
The main reason most folks sustain huge losses trading warrants is that they do not cut when mother share pull back. Look at the example charts again. When BIMB showed signs of weakness in early Feb'12, the momentum already turned down with the blue line higher than the green line, the warrant plunged much faster than the mother by mid Feb'12.
Upon selected a good mother stock and its most preferred call warrant, wait for reverse (rebound) break out of mother share (after a dip) and then buy the call warrant. However, always be prepared to cut loss if mother share pull back. The momentum indicator should be green line cross above the blue before buying.
Do not pick the wrong type of warrant - there are CBBC (J) and also put warrant (H). Go to this link to learn more:- http://www.bursamalaysia.com/website/bm/products_and_services/equities_resources/structured_warrants/types_structured_warrants.html
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