Sunday, 21 July 2019


Gross Profits : RM1,400
Return on Investment (ROI) : 12.9%
Duration : 8 minutes

As part of our Hang Seng series covering successful trades of both call and put warrants - essentially going long or selling short - today's example utilises similar trading principles that we have described  previously.

But there are some nuances we wish to highlight. We will break down this simple trade into its most basic component. From this, you will know exactly what's needed to launch into index warrants trading with maximum profit potential and minimum downside risk.

A bit of an explainer into why we like the Hang Seng Index so much. The Hong Kong benchmark is basically the best proxy for everything that's happening in the world right now. We can take the current headlines in the business newspapers and trade on those angles. HSI warrants - of the call and put variety - are widely available on Bursa Malaysia. They are as liquid as they are volatile, making them the perfect day trading tool.

But of course, volatility usually brings a shitstorm from time to time. Large, sudden moves can kill what was just minutes ago a profitable position. Markets can also move very quickly to absorb any relevant market-moving news, hence your upside potential would be capped.

To counter this, we deliberately decided to trade at the fringes. For example, 99% of the time we only trade a call or put warrant when they are in the red on any particular day. 

The trades are simply the purest representation of contrarianism; we trade in expectation of a bounceback. If the warrant goes from red to breakeven, we're already profitable. If it moves into green territory? Bonus profits.

But to undertake such a foolhardy endeavour, you must be very discerning about your trading choices. Be a chooser or you'll end up a beggar.

In order to determine whether an index warrant trade is in fact tradeable, we created a stringent set of filters. These are important in order to avoid blind speculative trading. Every approach must be grounded in logic.


To make your life easier, here's what we recommend:

1) Pick a cheap and liquid (high volume) call warrant. Then pick a put warrant with the same traits. We define cheap as anywhere between 20-35 sen. (Editor's Note : It's really up to you. This is the range we are comfortable with)
2) Keep those two warrants in your watchlist. Their movements are an indication of how the index is performing. Don't trade if the warrants move irrationally (for example, if both call and put warrants are both in the red for some reason. It doesn't make sense).
3) Take note of potential market moving events. In the HSI's case, it's typically news relating to global markets (trade war, US Fed interest rates) and China (economic numbers).

4) Most importantly, watch for overreactions in the warrants. This is where prices move too fast as a result of some new, super positive or negative piece of news. This is also where you can start thinking about trading.

On 15 July 2019, the news in question was this:

That's right; Chinese GDP figures. The reaction on Monday was swift and brutal; the Hang Seng dropped precipitously at the open. 

At the time, these were our call and put warrant pairs:

They are good options as both were trading at around the 15-30 sen range. Note that the 'C' is how call warrants are denoted, as is 'H' for put warrants. They are also very liquid.

Our personal filter for trading these are quite extreme. We'd only consider trading them if the price had dropped by 20% or more. As you may realise, the resultant market drop from the Chinese GDP figure brought death and destruction to the value of HSI-C5P, our call warrant pick. At its lowest point on this day, the call warrant fell by 22%.

Now, it is important to ask two questions.

1) Now that the market has absorbed the impact of this news, will there be a rebound?

2) What is really the best warrant to trade?

Addressing (1) is where news analysis comes in. Nobody can teach you this but yourself.

Essentially, this skill is about determining how certain news event affects stocks or warrant prices. They are always relative comparisons; News Type A would usually cause this stock to drop X %, or News Type B would cause the stock to drop X%, before rebounding.

Understand that the China GDP news is not really shocking; it was in fact widely predicted. Yet the market impact was real. This is where we had to draw the line and trust in our judgment.

We believed that an expected negative news (China GDP slowdown) would cause a brief shock before a rebound.

Only truly bad news would cause markets to stay down with no rebound in sight : for example, a sudden halving in China GDP growth, or even worse, a negative GDP figure (doomsday scenario).

In other words, if you were to create a ranking system of bad news, with 1 = not too shabby and 10 = we're all screwed, this China GDP development would probably be a 4. Yet the market reaction was really strong! This was when we smelled opportunity.

Now that we are all buttered up and ready to trade, let's look at (2). Sure, HSI-C5P is in our watchlist, but is it the best call warrant to trade?

In a word : no. The honour belongs to HSI-C5J, which is even cheaper. But of course that brings its own set of risks.

HSI-C5J is simply the supercharged version of HSI-C5P. It is close to expiry, and when warrants get to this point, they become more volatile. A cheap, close-to-expiration call warrant reacts the strongest to market moving developments such as this China GDP thing. Hence, this call warrant's intraday low was a massive 40%, or a drop from 19 sen to 11.5 sen in a day.

The call warrant is not hard to miss - it was the top traded Hang Seng call warrant on that day, with tens of millions of them traded. We certainly didn't miss the opportunity to go in at a 40% discount. It only has to go up slightly for us to make four-figure profits. This we like. 

To go back to HSI-C5P, the warrant remains good, but it simply offered less upside, and was pricier. Relative to the amount of risk we were committing to take, we preferred the supercharged option.

And now for the last part : we needed validation that a rebound was actually happening. You can simply look at real time prices for the Hang Seng Index on Google Finance to see this. But the associated call warrant needs to appropriately reflect the rebound. 

For this part, we chose to wait until HSI-C5J gets off its lows on its own. Trading was very volatile so there was no such thing as the right volume or liquidity. The warrant simply has to rise in price - this is the final validation for us to get in. 

As a side note : know that we could be totally right about all the other things we mentioned here, but if the warrant doesn't recover in price, there is really nothing to trade. If the price doesn't prove how right you are, the trade is a wrong one to make.

Like Rocky Balboa in the 10th round, HSI-C5J got itself up. It quickly rebounded to 14 sen, prompting us to put in our first buy order. Our uneducated guess is for the rebound to hit at least 18 sen (Editor's Note : as usual, we were counting on a 10% profit target or more; it's the only reason this trade is worth doing).

Actually, we couldn't get in - the price movement was too fast. At 14.5 sen? Same thing.

Shockingly, we only got in at 15.5 sen. You may think that's terrible, but we think it was a good thing. In our mind the swiftness of the rebound exceeded our own expectations. This 'upside volatility' is what we live for, and we stood a chance of making great profits in a very small amount of time. 

As it happened, we conservatively exited at 17.5 sen. We should have stuck around; the warrant eventually hit 20 sen but that's OK. Remember that our profit target was met: at 10% yield, we don't care about the residuals. It was time to exit.

And for a trade lasting all of eight minutes? We'll take that.

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