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Categories
| Kenanga: Good time to buy call warrants |
| Business & Market 2009 | |||
| Written by Surin Murugiah & Darlene Liew | |||
| Thursday, 23 July 2009 00:01 | |||
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Its director for equity derivatives and structured products Philip Lim said conditions were now conducive for investors to begin picking up call warrants, as the market for the instrument had just passed one cycle, or a phase in its market acceptance. Lim noted that call warrants would usually pick up after two to three cycles, and cited countries like Hong Kong and Singapore where warrants are more popular among investors. Lim, however, said investors need to be fully educated on the risks of call warrants. He said call warrants are complex instrument that requires experience and constant monitoring by traders and investors who wish to benefit from them. He also said call warrants are short term in nature, unlike shares that were more suited for long-term investments. "There is the possibility of losing the entire option premium. Investors must understand that warrants have a limited life, and time will reduce option price rapidly as the warrants approach expiry date," said Lim. He was speaking yesterday at a seminar on warrants organised by Kenanga for journalists. Lim said warrants are varied, from the ones issued by companies themselves, to structured warrants issued by approved financial institutions. "The former is for companies to raise funds while the latter offers an investment tool to investors," he said. He said call warrants, which are a listed call option that gives the buyer the right but not the obligation to purchase the underlying instrument at the pre-determined price, had been actively issued in Malaysia since 2006. Kenanga launched its base prospectus in May 2008 and to date has issued three call warrants, namely on Genting Malaysia, Genting Bhd and Bumiputra-Commerce Holdings Bhd. He said to benefit from call warrant trading, investors must establish the market direction and the underlying instrument to trade. He said this included analysing the underlying instrument by looking at its charting history and valuations, as well as comparing it with its peers. "Investors need to compare exercise ratios, volatility, expiry period and price. However, a cheaper warrant does not necessarily mean it is a better buy. "Most importantly, investors need to set a target price, be prepared to cut losses and reduce the time frame to gain from trading in warrants," he said. Lim said that on the positive side, warrants reward risk-takers in a bull market, and that the downside is limited to the option premium.
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