Put Warrants - Knowledge And Tricks

Nowadays, index warrants, either call warrants or put warrants, are getting popular in Malaysia market. FYI, put warrants are only available in Bursa Malaysia since August 2009. Meaning, during 2008 economy crisis, put warrants are not exist in our market. Most investors did not have the opportunity to capture it. However, don’t forget global market is a cycle. When the bear market comes again, it will be the best time for put warrants to fly. In other words, if you are an expert, you can earn money during bull market and also bear market.

What is put warrants? I believe most investors only know that when FBMKLCI index drop, put warrants price will go up and put warrants price are affected by the movement of index. However, it is wrong. To be correct, put warrants price are affected by FBMKLCI futures price, and not FMKLCI index.

The FBMKLCI futures are listed and traded on the Bursa Malaysia, the index warrants price is linked to the movements in the futures price over time and at expiry settlement will be based on the closing level of the relevant futures expiry. This is done because the issuer will use the futures contract to hedge the index warrants.

This is the reason why sometimes you will notice when FBMKLCI index drops, some put warrants will also drop.

Just to share a trick or maybe an earning opportunity about warrants. When the future contracts change, there will be difference between the contracts figure. Hence, the warrants price also will adjust accordingly. Investors can make use of this opportunity to grab a cheaper put or call warrants. However, we don’t have the data of the futures that the issuer hedge.

FBMKLCI Index

27^th August Closing à 1,601.70

28^th August Opening à 1,609.04

Difference à 7.34 points

INDEX WARRANTS	27th August – Closing	28th August – Opening	Difference
FBMKLCI-HW	0.415	0.39	0.025
FBMKLCI-HX	0.775	0.73	0.045
FBMKLCI-HY	0.60	0.55	0.05
FBMKLCI-HZ	0.49	0.445	0.045
FBMKLCI-H1	0.47	0.44	0.03
FBMKLCI-H2	0.82	0.78	0.04
FBMKLCI-H3	1.13	0.995	0.135

1^st September Closing à 1,609.21

2^nd September Opening à 1,602.60

Difference à 6.61 points

INDEX WARRANTS	1st September – Closing	2nd September – Opening	Difference
FBMKLCI-HW	0.51	0.515	0.005
FBMKLCI-HX	0.83	0.855	0.025
FBMKLCI-HY	0.63	0.66	0.03
FBMKLCI-HZ	0.485	0.495	0.01
FBMKLCI-H1	0.515	0.54	0.025
FBMKLCI-H2	0.895	0.905	0.01
FBMKLCI-H3	1.11	1.15	0.04

I believe during 27^th August, the issuer had referred to a new futures contract and hence the price of put warrants is adjusted accordingly. The above comparison is just for illustration.

In terms of market makers, the role of issuers is to provide continuous buy and sell quotes in their warrants. In doing so, the market makers provide liquidity in the warrants so that investors can easily enter and exit their trades. The quality of the issuers is often a big factor for investors choosing a warrant.

Before choosing a put warrants, you need to be confident that the market maker will be there to provide consistent pricing throughout the life of the warrant so that you can enter/exit the trade in a fair and liquid market.

The trading system will enter bid and offer quotes in the index warrants based on the price in the futures. As the price in the futures move, the issuer’s quotes will also adjust. Some making systems will also change their bid and offer volume to follow the volume in the underlying share.

In Malaysia, there are a few exemptions to the continuous quoting requirements, these can be found in the issuers’ listing documents. The most common being, when the warrant value falls below the minimum bid of certain price, in this case the warrant is considered worthless and the issuers are no long required to provide a bid price.

List of issuers of index warrants

1. Macquarie Capital Securities
2. RHB Investment Bank
3. Kenanga Investment Bank
4. CIMB Bank
5. Maybank Investment Bank

For me, I preferred put warrants which issued by Macquarie. It is safer as Macquarie provides high liquidity in warrants. At the end of each trading day, Macquarie will also capture the bid price of the warrant slightly before the close of trading and use this to represent the 'closing price'. I am not sure with other issuers.

Regarding how to pick a put warrants, besides than the common use of discount/premium, gearing ratio and expiry date, there are still few other factors to consider. I will talk about this later.

Just for sharing.