Warrant

In general there are 2 types of warrant:
- Call Warrant
- Put Warrant

Call warrant is expecting the stock or index we buy to go up, means that if you bought HSI CW, and Hang Seng Index goes up then you will earn money. While, Put warrant is the opposite of call warrant, means that it expect it to go down then only can earn money.

If compare with Stock, this warrant is much more volatile and risky. The warrant you buy can go down until $0.005 or even until no value. That's why normally people trade warrant instead of investing on it. Unless you are really sure that you are in the right direction, you better trade it and set cut loss target properly and must be discipline to prevent big losses.

You can notice that, warrant will have letter and number written on it. For example HSI 17200 MBL ECW081230, it means that:
- HSI --> Hang Seng Index
- 17200 --> The value to be compared during expiry date
- MBL --> Company that produce the warrant
- ECW --> Call Warrant, if PW then it is Put Warrant
- 081230 --> Expiry date on 30 December 2008
Reference: HSI 17200 MBL ECW081230

If you purchase this warrant, it means that this warrant will expired on 30 December 2008. If you hold this warrant until its expiry date, the warrant producer will calculate the average last 5 days (you can clarify it with the warrant producer) of this HSI value and compare with the 17200 to decide whether you will earn money or loss money.

If the average of last 5 days is above 17200 then you will earn money, else you will loss your money. When you earn money doesn't means that you will totally get back all your money invested on it. Example, if you purchased this warrant $5000,00. At expiry date, eventhough HSI average is above 17200 (but not so far from it), its possible that you will just get back only $2000 after calculation. To get more details about the calculation and information you can try refer to http://www.dbwarrants.com.sg/

There are a lot of things you can read about warrant, but some important points you need to know are:

1. Time and Expiry Date --> When you buy warrant, you will have disadvantage of time decay. The closer this warrant to expiry date, then its price and value will be lesser.

2. Volatility --> Warrant is very volatile, you can easily earn or loss 30% in a day. During volatile market, it is quite normal that you can earn or loss 100% or even more than that in 1 day.

3. Volume --> If you want to trade warrant, trade the warrant that has high transaction volume to prevent being stuck with little movement and ended loss because of the time decay.

4. Shorting warrant --> Remember that for whatever reason you must never ever naked short warrant (sell it without buy back at the same day). Because, it can easily burn your money when SGX (Singapore Market) buy back for you. They will keep bid up the price until they manage to get the seller, you can easily loss 20 bids during volatile market. If you naked short $1000, it is not impossible that you might ended up have to pay $2000-$4000 if you are at the wrong direction during volatile market. Other than that, there will be some fees and penalty charges which is not cheap and also at this time SGX quite strict to naked short (even with stock). There will be high penalty charges if you naked short. So, remember that NEVER EVER naked short warrant.

5. Holding overnight --> When you buy HSI warrant, you can consider it as gambling if you hold it overnight. The difference is just that, you gamble is bet after you do your research. The reason is, because this warrant usually will refer to Dow Jones (DJIA) Index to decide its opening price the next day.
For example: This call warrant price ended at $0.45 at 05:05pm. Then at night DJIA increase 200 points. The next day, you might see the opening price will give you bet ween 10% to 30% profits. But, if DJIA close at negatif 200 points, then you might see the price of your warrant drop by 10-30%. If DJIA ended flat, you can see a slight drop of your warrant (approx 5%). The reason is because warrant has time decay as mentioned in point 1.

6. Market Maker --> Market Maker is the one set the buy and sell price of this warrant. Volatility and fast movement of warrant are controlled by them. For example, when you use market depth you can see both buy and sell queue quantity are 500,000. This is queued set by the Market Maker. During volatile market, they can easily take all the other queues done by the normal investors/traders when they adjusting the price. If in Casino, we can say Market Maker as a Dealer.

There are a lof more you need to know about warrant such as profit/loss calculation, which time is good to buy or sell, when to cut loss, etc. You should do more research, get some advice from experts and trade virtually before you trade with real money.

Trust me that, cut loss target discipline is the most important of warrant trading. Do not ended with false hopes and keep wait for your warrant to come back to the same price as you bought before if you are at the wrong direction. You might ended forever stuck and keep see your warrant price decreasing everyday because of the time decay.

Some important example:
You buy call warrant at $0.45 when HSI were 18000. Then currently your warrant price is only 0.35, because HSI index was dropping the last few days to 16500. Later on, maybe next week HSI managed to rebound back to 18000 or 18100, but your warrant price is only 0.41. This kind of situation is very normal when you trade warrant. The reason is like what I mentioned before, time decay. Other than that is speculation, people or Market Maker might assume this HSI index will drop again.

Conclusion:
It is better to trade warrant instead of investing on it. Unless you are confirm 90-100% with your decision to invest on it. Good Luck :)