Posted by brendonyeap > 2014-03-30 16:03 | Report Abuse

Thanks KCHONG for ur analysis...whats the TP for it, mid to long term?

Posted by kingcobra > 2014-03-30 16:53 | Report Abuse

With indepth studies by kcchongnz I'm pretty sure it WILL boost up Bimb-Wa price in the near n long terms 'cos expiry date more than 9 years' time ...anyway thank u...job well done n hoping 2 see more of these on those deserving counters!

Posted by Horsefield > 2014-03-30 18:51 | Report Abuse

Hi KC, may I know what method you use to calculate the historical volatility of 29.5%? If standard deviation is used in your case, what is the time frame?

I did some calculations, but the value is slightly differ from your calculated value.

period σ
1yr 41.1%
6months 27.2%
3months 24.8%
1month 8.1%

Posted by slampdung > 2014-03-30 18:56 | Report Abuse

Did you use excel to get that values?

Posted by kcchongnz > 2014-03-30 19:02 | Report Abuse

Horse field,
What I did was I used the weekly price from yahoo finance, obtain the weekly return, and compute the standard deviation of the weekly return. Then I convert that to annual std by multiplying sqrt (52). That is the volatility of bimb.

You could use the daily data too and do the same to get the annual std. There will be some difference in the value obtained. But that is valuation, an art. Anyway, the option pricing is itself not an exact science.

Posted by houseofordos > 2014-03-30 23:14 | Report Abuse

KC, informative write up.

What is the purpose of looking at implied volatility instead of just premium to determine good entry price for warrant ? Would implied volatility of the option relative to the historical volatility provide any more useful information ? Hope you can enlighten. Thanks

Posted by houseofordos > 2014-03-31 00:03 | Report Abuse

KC, I ran a similar exercise with PJDEV-WC with following conditions :-

Underlying price = RM1.45
Strike price = RM 1
Ex- ratio =1
Days to expiry = 2435
Annual volatility = 25.6%
Div yield = 3.4%

I was very surprised to find the black-schole intrinsic value for warrant to be only RM0.49 considering the significant time to expiry and only 15% premium. I found BSM valuation to be extremely sensitive to dividend yield input. A 0% DY assumption increased intrinsic value to RM0.74. Would PJDEV-WC still be a good investment in your opinion and why ?

Posted by kcchongnz > 2014-03-31 10:40 | Report Abuse

Posted by houseofordos > Mar 30, 2014 11:14 PM | Report Abuse

KC, informative write up.

What is the purpose of looking at implied volatility instead of just premium to determine good entry price for warrant ? Would implied volatility of the option relative to the historical volatility provide any more useful information ? Hope you can enlighten. Thanks

Premium varies widely depending on the time to maturity, volatility and gearing etc. So it is not a good measure of if a warrant is expensive or cheap.

In practice, implied volatility (IV) is the most important factor in determining if a warrant is worth buying. Often options are traded based on implied volatility. Compared to historical, IV is forward looking and hence preferred. Read the article at the link appended below:

http://www.optionsplaybook.com/options-introduction/what-is-volatility/

Posted by kcchongnz > 2014-03-31 11:57 | Report Abuse

Posted by houseofordos > Mar 31, 2014 12:03 AM | Report Abuse

KC, I ran a similar exercise with PJDEV-WC with following conditions :-

Underlying price = RM1.45
Strike price = RM 1
Ex- ratio =1
Days to expiry = 2435
Annual volatility = 25.6%
Div yield = 3.4%

I was very surprised to find the black-schole intrinsic value for warrant to be only RM0.49 considering the significant time to expiry and only 15% premium. I found BSM valuation to be extremely sensitive to dividend yield input. A 0% DY assumption increased intrinsic value to RM0.74. Would PJDEV-WC still be a good investment in your opinion and why ?

A great analysis of option from you. You were using the Nobel price award winner Black-Scholes Option Pricing to value the PJD Wc.

Yes, cash dividends issued by stocks have big impact on their warrant prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date, the higher the dividend, the larger is the drop in the stock, and hence the lower the value of warrant. Share buyback has the opposite effect on option price.

Although option pricing is used widely in derivative markets, and the BS OPM won Nobel price award, it is not infallible. This is because the assumptions behind it, such as the log-normal behaviour of share price, which is far from reality.

the other factor for the price movement of warrant is the supply and demand in the market, just like normal stocks which doesn't follow price and value relationship.

No I won't buy PJD Wc at the present price of underlying share and warrant price. Like what you have analyzed, Wc is overvalued, at least theoretically. I am not a trader as you know.

Posted by kcchongnz > 2014-03-31 18:59 | Report Abuse

Posted by brendonyeap > Mar 30, 2014 04:03 PM | Report Abuse

Thanks KCHONG for ur analysis...whats the TP for it, mid to long term?

Interesting question. Never thought of "target price" for warrants. Let me try to answer you this question.

Warrant is a stock call option, a derivative deriving its value from something, that is the underlying share price. Meaning the value of BIMB Wa depends on what the price of BIMB share price is. I know many would disagree with me because they would opine that it depends on what price people are willing to sell, or buy. That would be very abstract for me because i won't be able to gauge what traders think about what they are willing to buy or sell a warrant.

So instead of "target price", I think in term of "intrinsic value". Yes warrant has an intrinsic value too just like common stocks. Its intrinsic value will depend what the underlying share price is.

The intrinsic value of BIMB Wa = Max[0, (stock price-exercise price)].

The table below shows the intrinsic value of BIMB Wa at various stock price of BIMB:

BIMB 4.00 4.33 4.50 5.00 5.50 6.00 6.50 7.00
IV BIMB Wa 0.00 0.00 0.00 0.28 0.78 1.28 1.78 2.28

So what would you think the possible prices of Wa could be within this 9 and a half years before it expires, when BIMB share price moves up and down? Mind you, this is only the intrinsic value. Wa also has valuable time value, which could be very valuable depending on the volatility and time to expiry.

In the above write-up, I used an option pricing to value Wa with all the data and assumptions (an artistic endeavor), and the fair value of Wa (intrinsic value+time value) is RM1.49.

So you notice I talk about intrinsic value and time value of warrant, not target price. Could you share with us your "target price"?

Posted by houseofordos > 2014-04-01 00:16 | Report Abuse

KC, thanks for all your explanation. The idea is clearer to me now... Just to clarify then, how do you gauge if the 12.3% implied volatility is considered low ?

Posted by kcchongnz > 2014-04-01 05:52 | Report Abuse

Posted by houseofordos > Apr 1, 2014 12:16 AM | Report Abuse

KC, thanks for all your explanation. The idea is clearer to me now... Just to clarify then, how do you gauge if the 12.3% implied volatility is considered low ?

To me the most important factor for the expected price of an option such as a warrant is its volatility. The higher the statistical or historical volatility SV), the higher the value of a warrant. This is because there is a higher probability that the warrant has a chance to be in-the-money and gets a good payoff. Also note that different stock has different SV.

Implied volatility (IV) is a forward looking number by gauging the market expectation; with the price the market willing to pay now, what is the "implied volatility"? This is done by "forcing" the volatility to make the market price equals to the value computed with the option pricing model.

Hence if the implied volatility (12.3%)is much lower than the statistical volatility (29.5%) of BIMB Wa, then the warrant appears to be cheap. This is because if the volatility of BIMB suddenly increases, the warrant price will increase in tandem.

However, there's no guarantee the market will make a violent move anytime soon which will spike up the price of BIMB Wa. By incorporating into trading an awareness of IV and SV, which are important dimensions of pricing, you can gain a decisive edge as an options trader.

Posted by jensenchee80 > 2014-04-06 17:36 | Report Abuse

KC, how to get the implied volatility (12.3%)and statiscal volatility (29.5%?)? Would you show me the formula?

Posted by houseofordos > 2014-04-07 15:54 | Report Abuse

KC what is your opinion on YTLPOWR-WB ? Gearing about 3x. Premium is only about 12% with 4 years to expiry. The good thing is that this company very aggressive in share buy back.

Posted by sleeplessguy > 2014-04-07 16:54 | Report Abuse

Hi kcchongnz, iam interested in your study of warrant. I understood the intrinsic value, premium%, gearing etc but confuse on implied volatility.

"What I did was I used the weekly price from yahoo finance, obtain the weekly return, and compute the standard deviation of the weekly return. Then I convert that to annual std by multiplying sqrt (52). That is the volatility of bimb."

Can you advise an example of the calculation of the BIMB-WA ( 29.5%)?

Posted by kcchongnz > 2014-04-07 17:03 | Report Abuse

Posted by sleeplessguy > Apr 7, 2014 04:54 PM | Report Abuse

Hi kcchongnz, iam interested in your study of warrant. I understood the intrinsic value, premium%, gearing etc but confuse on implied volatility.

"What I did was I used the weekly price from yahoo finance, obtain the weekly return, and compute the standard deviation of the weekly return. Then I convert that to annual std by multiplying sqrt (52). That is the volatility of bimb."

Can you advise an example of the calculation of the BIMB-WA ( 29.5%)?



That is exactly how I obtained the historical volatility of BIMB.

For implied volatility, you have to understand Black-Scholes Option Pricing. I have explained what implied volatility means in the article.

Posted by kcchongnz > 2014-04-07 17:17 | Report Abuse

Posted by houseofordos > Apr 7, 2014 03:54 PM | Report Abuse

KC what is your opinion on YTLPOWR-WB ? Gearing about 3x. Premium is only about 12% with 4 years to expiry. The good thing is that this company very aggressive in share buy back.


YTL Warrant was trading at a discount a few months ago when its underlying share gone up to 1.80+ when the company aggressively buying back shares. Since then the underlying share dropped to now at 1.60, and its warrant price retreated in tandem. That is the peril of playing derivatives. The same thing I can see happening to many other warrants. You are at the mercy of someone else.

Forgetting the above, at 53.5 now when the underlying share is at 1.60, it is a good bet as you have my spreadsheet to do evaluation yourself. This is especially true the company is continuing to buy back share continuously, according to your perception, and especially the shares bought back are cancelled off. And also provided you are not trading and hope for short term gain.

Posted by houseofordos > 2014-04-07 19:20 | Report Abuse

thank you KC.

Posted by sleeplessguy > 2014-04-07 22:47 | Report Abuse

In the above write-up, I used an option pricing to value Wa with all the data and assumptions (an artistic endeavor), and the fair value of Wa (intrinsic value+time value) is RM1.49.


Hi KC,as known intrinsic value = max (0,Underlying(4.23) - exercise price(4.72) )= 0
but how could I know the time value and how could it be the fair value 1.49?

Posted by kcchongnz > 2014-04-08 04:29 | Report Abuse

Posted by sleeplessguy > Apr 7, 2014 10:47 PM | Report Abuse

Hi KC,as known intrinsic value = max (0,Underlying(4.23) - exercise price(4.72) )= 0
but how could I know the time value and how could it be the fair value 1.49?


Use option pricing to find the value of a warrant (Wp).

Wp = intrinsic value + time value

1.49 = 0 + time value
time value = 1.49

You must know how to use the option pricing to find Wp. To explain the theory will take pages and it is that easy to truly understand just by reading. There are plenty of resources in the web and you have to have the patience to try understand it, and practice. No short cut.

I can see your keenness. Very very few are interested in the theory and it is doubtful if it is that useful. But in my opinion, there is plenty of intuition in the theory.

Anybody interested if I include this in my web-based investment training?

Posted by shareinformation > 2014-04-08 09:00 | Report Abuse

Hi KC, hope i am not too late to join your web-based investment training. kkpsk2011@gmail.com

Posted by kcchongnz > 2014-04-08 09:13 | Report Abuse

Posted by shareinformation > Apr 8, 2014 09:00 AM | Report Abuse

Hi KC, hope i am not too late to join your web-based investment training. kkpsk2011@gmail.com


No you aren't. I am getting serious now. Still collecting names and preparing for my course.

Posted by kcchongnz > 2014-04-08 15:00 | Report Abuse

ok recorded. Please delete your email address from above here

Posted by sleeplessguy > 2014-04-08 22:49 | Report Abuse

Hi KC, some parameter inquiry of option pricing, is the dividend yield is refer to its mother BIMB? Besides the risk free rate 4% where could we get this information(try to search but couldn't find)?

Posted by sleeplessguy > 2014-04-09 08:23 | Report Abuse

ckiat1986@hotmail.com, count me in as well:)

Posted by kcchongnz > 2014-04-09 08:48 | Report Abuse

Posted by sleeplessguy > Apr 8, 2014 10:49 PM | Report Abuse

Hi KC, some parameter inquiry of option pricing, is the dividend yield is refer to its mother BIMB? Besides the risk free rate 4% where could we get this information(try to search but couldn't find)?

Yes, dividend yield refers to the underlying share. Risk free rate means what it meant. You can use the short term MGS rate as risk free rate.

Posted by sleeplessguy > 2014-04-09 10:19 | Report Abuse

Noted and thanks:)

Posted by Avocado_C > 2014-04-09 11:40 | Report Abuse

Good day KC, we have discussed before that when trading in warrants and call warrants, it is important to analyse the underlying mother share as well. Let's look at the following numbers (all TTM basis as extracted from I3):

Counter P/E DY P/B
BIMB 18.19 0.81% 2.36

Affin 8.83 3.91% 0.90
AFG 12.47 1.69% 1.71
AMMB 12.36 3.1% 1.71
CIMB 12.39 3.21% 1.90
HLB 16.70 3.2% 1.80
MBB 12.80 5.52% 1.87
PBB 17.15 2.61% 3.41
RHB 11.56 1.94% 1.28

Median 12.47 1.80
Average 13.6 1.88

In your view, why is BIMB trading at such a high P/E and P/B compared to the the rest of the banking groups listed on Bursa?

Whilst I understand the high premium accorded to PBB due to its management capability, asset quality and historical growth rate, I can't seem to convince myself with the pricing of BIMB, except for its stake in Takaful.

Can you enlighten me what's the upside for BIMB (that will also trigger interests in its WA other than a takeover bid)? Yes, I agree with you that the gearing and the time value of this WA is awesome, but I really need more justifications to convince myself to invest in this WA. Do you think you can spare your thoughts and help me out?

Posted by kcchongnz > 2014-04-09 12:14 | Report Abuse

avacado, the formulation of the option pricing by Black and Scholes was based purely the share price of the underlying stock. Yes, it is the price, not the value. The underlying assumption is the efficient market, ie the value equals the price, and that share price moves in like the Brownian Motion, and the distribution of the stock price is lognormal, etc etc. This is especially true for short duration option, where stock price is the determining factor, rather than the value.

In BIMB warrant which is a long duration option, I would agree with you the fundamentals of the company is important, but that is not in the assumption of the model.

BIMB's PE is high mainly because of its poorer performance for its final quarter result ended 31st December 2013 resulting from a one-off tax charge of dividend income, I think.

However it is the future expectation which is important for the share price performance. With its recent acquisition of 49% equity interest in Bank Islam, it is expected that there will be substantial increase in earnings in the future.

Posted by Avocado_C > 2014-04-09 15:19 | Report Abuse

KC, thanks for your pointer. After adding additonal 49% of profit from Bank Islam and accounted for the enlarged share base, I derived a theoretical PE of 12.44x @ 31.12.2013, which is roughly the industry median. Nevertheless, the P/B ratio is still high because the net assets of Bank Islam has been consolidated.

Noticed that 75% of Bank Islam loans come from retail customers, so I believe it's a challenge for them to grow the loan book at the same rate like previous years. Generally, the banking sector is quite challenging, which is already reflected in the share price.

Posted by kcchongnz > 2014-04-09 15:24 | Report Abuse

Avacado, try use this valuation method for BIMB.

P=ROE/Required return * Book value

ROE is the expected future Return of equity

Posted by Avocado_C > 2014-04-09 17:08 | Report Abuse

KC, I got a price lower than its existing share price. Maybe it's my assumption. How would you compute then?

Posted by sleeplessguy > 2014-04-09 17:52 | Report Abuse

I did some fundamental calculation, can advise whether it is correct?

Ratio : 1.06
Working capital : ~3 billion
Debt to Equity Ration : 15.8
EPS : 23.65
PE : 19.2
ROE : 9%
DY : 1%
NTA 1.82

Overall can we conclude the fundamental not strong enough? Please correct me if I am wrong

Posted by kcchongnz > 2014-04-09 17:55 | Report Abuse

That formula is good for banks and other financial institutions. Everything hinges on your assumptions, ie what would you expect its future earnings per share? Not the EPS in the past.

For me I have no knowledge of it except some analysts are bullish about its Takaful business, and its prospective income form Bank Islam.

I invest in its company warrants basing on the assumptions that the share price of BIMB has incorporated all information and expectation of the company, ie relying on its implied volatility against the historical volatility.

Posted by ccs999 > 2014-04-12 00:08 | Report Abuse

Hi boss kcchongz, would you consider destini-wa as your warrant profolio? Please advise. Thanks. Regards, Chua

Posted by kcchongnz > 2014-04-12 10:43 | Report Abuse

Posted by ccs999 > Apr 12, 2014 12:08 AM | Report Abuse

Hi boss kcchongz, would you consider destini-wa as your warrant profolio? Please advise. Thanks. Regards, Chua


ccs999. have you worked under me before?

The share price movement of Destini warrant depends on the share price movement of Destini more than the true value of Destini. At 21 sen when Destini is at 57sen, the implied volatility is 21%, not high at all, and hence not expensive for Destini warrant. So if you believe Destini share price will go up in the future, good to invest in its warrant. It gives a gearing of 2.7 times.

Is the fundamental of the business of Destini important? It is in a long term. It made profit for the last two years. But I don't like the quality of its earnings. There is no cash flows from operating activities at all, not good in my opinion.

So for me I won't invest in the warrant. But as i have said, the share price movement of Destini is more important than its value when investing, especially punting, in warrant.

Posted by ccs999 > 2014-04-12 11:08 | Report Abuse

Hi kcchongz,no, I never working with you before but I wish that I can... Hehe...

Posted by skyu > 2014-05-08 20:01 | Report Abuse

Very detail. Thanks

Posted by chang21 > 2014-07-13 19:11 | Report Abuse

BIMB-WA is an excellent buy with rumors on a possible merger announcement soon.

Posted by brendonyeap > 2014-07-25 23:48 | Report Abuse

Kc: how do calculate volatility of a stock? TQ

Posted by kcchongnz > 2014-07-26 02:32 | Report Abuse

Posted by brendonyeap > Jul 25, 2014 11:48 PM | Report Abuse
Kc: how do calculate volatility of a stock? TQ

Posted by kcchongnz > Mar 30, 2014 07:02 PM | Report Abuse X
Horse field,
What I did was I used the weekly price from yahoo finance, obtain the weekly return, and compute the standard deviation of the weekly return. Then I convert that to annual std by multiplying sqrt (52). That is the volatility of bimb.

You could use the daily data too and do the same to get the annual std. There will be some difference in the value obtained. But that is valuation, an art. Anyway, the option pricing is itself not an exact science.

Posted by donfollowblindly > 2014-10-29 22:29 | Report Abuse

If follow this blog advise I lose money.

Posted by kcchongnz > 2014-10-30 05:22 | Report Abuse

Posted by donfollowblindly > Oct 29, 2014 10:29 PM | Report Abuse

donfollowblindly
2 posts

If follow this blog advise I lose money.


I like your new identity. Yes absolutely, don't follow blindly, do you always follow blindly? Really don't know why your comment is flagged. It is an excellent comment.

But your comment though excellent, may be out of point and won't get any mark in an exam. Why?

The article I wrote here is about sharing of pricing of derivative such as warrant; What is premium and discount, intrinsic value and time value of warrant, gearing, how to use option pricing to price it, the various scenarios if the underlying share goes up or down and the resulting return etc. Nothing is mentioning about asking you nor advising you to buy it.

You read all the good comments there? All are talking about those stuff I mentioned above, nothing about buying or selling. Very good discussions and learning.

Won't you like to join in this type of fruitful discussion, constructively?

Posted by funda > 2014-11-11 10:58 | Report Abuse

@kcchongnz, like your case study about bimb wa...
do u notice that for the past few months, mother BIMB vol hv been increasing but the share price still stagnant below 4.30 level... it seems like someone is trying to prevent the price from going up, but for what reason? at first, I thought there is share change hand between major shareholder to someone...but after checking the percentage of share owned by EPF and tabung haji from 2013 to 2014, guess I am wrong...look more like they are selling and buying between their left and right hand...

Another question is, Do you foreseen a risk for BIMB wa when there is M&A activity for BIMB... because the offer price for BIMB Wa can be solely depend on take-over company generosity... normally they would not pay extra premium for the warrant rite?

Posted by kcchongnz > 2014-11-11 11:19 | Report Abuse

funda,

No, I don't notice the right hand left hand thingy as i don't watch what they are doing. Good observation of yours.

As BIMB warrant's value is merely made up of time value with a long time to expire, if BIMB is taken over by another company and the offer price is what is now, BIMB warrant is dead. Certainly there is a risk. Tell me in investing, is there such thing as riskless?

No, I don't think they are obliged to pay extra premium to warrant holders.

Nothing is sure in investing, even in life. So that is why I never encourage people to swing for the fence. I always discouraged people to leverage in investing, never never encourage people to use margin financing.

Posted by funda > 2014-11-11 12:05 | Report Abuse

Hi kcchongnz,
Thanks for the explanation...
Agreed with that, I also not a fans of over leverage, that's why never apply for margin account, just to prevent myself from hand itchy...

At least for the mid-term, I still do not foreseen BIMB to be a M&A target(cross finger)... hope the mother will break-out 4.30 soon...

Posted by jimmyfallow > 2014-11-20 18:20 | Report Abuse

bullchett, all kcchongnz buy call masuk longkang. bought 0.66 now look at the price. sifu from longkang.

Posted by kcchongnz > 2014-11-20 18:48 | Report Abuse

Posted by jimmyfallow > Nov 20, 2014 06:20 PM | Report Abuse
bullchett, all kcchongnz buy call masuk longkang. bought 0.66 now look at the price. sifu from longkang.

Wow, first time comment in i3investor already know all my "buy call" masuk longkang. Genius! Tell us what were you in your previous life?

Actually you got it wrong. Anyway I don't expect you to get anything right after all.

The article here talked about warrants and their pricing. Other things such as gearing, premium, intrinsic and time value, volatility, historical and implied volatility etc. You can see from the comments above that many people benefited in learning something about options and their pricing.

Posted by donfollowblindly > 2014-11-20 21:29 | Report Abuse

Agree with jimmyfallow. How to retire comfortably if I have longkang stock like this(down 23% since his recommendation). So don't follow KC Chong tips blindly despite his sifu status in i3.

Posted by kcchongnz > 2014-11-21 05:08 | Report Abuse

Posted by donfollowblindly > Nov 20, 2014 09:29 PM | Report Abuse

Agree with jimmyfallow. How to retire comfortably if I have longkang stock like this(down 23% since his recommendation). So don't follow KC Chong tips blindly despite his sifu status in i3.


One of the best comments above. You are absolutely right, don't follow KC Chong. And never follow tips blindly. But thanks for your recognition of KC Chong's sifu status in i3 as mentioned by you.

Yes, you most likely won't reach your wealth building goal following KC Chong's tips. As a matter of fact, not only my tips (if any), also others, including your broker, remisier, analysts, financial adviser and investment bankers etc. This is because nobody will take care of your interest.

But I like to correct you a couple of points here.

1) I don't look at myself as a sifu to you, or to anyone else. I am just a small time retail investor, not an analyst, nor an investment banker. I am not even in this industry.

2) I never give tips as mentioned by you. I share knowledge if you can understand English well.

3) Jimmyfallow so far has 1 post. Even that one post he also deleted already, wondering why. And you have 5 posts, and you seem to know me so well. Are you such an admirer of me? Then you deserve not to be able to retire comfortably. It is your own fault following me.