I start with one first, Kulim company warrant, Wc
At the close on 27th December 2012, Kulim and its warrant Wc closed at RM4.82 and RM1.01 respectively. Subsequently Kulim announced a special dividend of 91 sen. The next day Kulim share price as expected jumped to high of RM5.20 before closing at RM5.00, for a gain of 3.7% for the day. On the other hand Wc jumped to a high of RM1.09 and closed at RM1.03, or a gain of just 2%. Wc has a gearing of 4.8 times, a delta of 0.67 (delta from option pricing model) and hence an effective leverage of 3.2 times. Why didn’t the price of Wc closed at approximate 12% gain, or 3.2 times the gain of Kulim theoretically? Is there a chance to profit from this anomaly?
Bursa last night announced that the revision exercise price of Wc to be adjusted from 3.83 to 3.13. Now we put aside all the price performance of Kulim and Wc and analyse to see if Wc is indeed a good investment basing on the price movement of Kulim. At yesterday’s closing price of Kulim and Wc at RM5.00 and RM1.03 respectively, the intrinsic value of Wc is RM1.87 (5.00-3.13), or 82% over its present price of RM1.03! I could buy Wc on Monday, send and pay RM3.13 for conversion at a total cost of RM4.16. I would enjoy the special dividend of 91 sen. Even if Kulim share price drop back 91 sen, the amount of special dividend, the share would still worth RM4.09 (5.00-0.91)! So my gain would be 91 sen per share, or 22%! Another big fat frog jumping all around? Dream, dream, dream, dream.m.m. But then without dreams, nothing will ever come through, will it?
First of all, if you are not already possessing Wc, you have no chance to enjoy the special dividend of 91 sen, because as expected, the management of Kulim has already pre-empt it. Secondly price of Kulim may have already run up even way before the announcement due to the action of insiders, and so Kulim may be, I said may be, overpriced already. Thirdly there will be an adjustment of the share price of Kulim after the ex-date of the special dividend. So everything depends on whether there will be further run up in the price of Kulim and what is the amount of downward adjustment of Kulim ex-dividend. This is because the value of Wc depends on the final price of Kulim after the adjustment. So do you think Wc is a good bet?
The value of Wc consists of two parts; the intrinsic value and the time value. the intrinsic value is straight forward and is computed based on the following:
Intrinsic value IV = Price of Kulim – Exercise price
Premium of Wc = (price of Wc+exercise price)/price of Kulim-1
Gearing = Price of Kulim/Price of Wc
Assuming that we adjust the share price of Kulim, now at RM5.00. With the special dividend, the adjusted price of Kulim is RM4.09 (5.00-0.91). Then
IV = RM4.09-RM3.13 = RM0.96
Premium = (1.03+3.13)/4.09 – 1 = 1.7%
Gearing = 4.09/1.03 = 4
Hence after adjustment of special dividend of 91 sen, Wc still has an intrinsic value of 96 sen, and it is traded only at a premium of 1.7%, with a gearing of 4 times. Have we forgotten something else? Yes, the time value of Wc.
Using Black-Schloes OPM, with the assumption of historical volatility of Kulim at 25%, dividend yield of 3%, and the risk free rate of 3.5%, Wc is worth RM1.20. 17 sen, or 16.5% above its present price of RM1.03. The 4.5 years of time value of WC is then equal to 24 sen (1.20-0.96). The following table shows the intrinsic value of Wc (ignoring the time value) with different adjusted price of Kulim after the special dividend:
Gain in Kulim -2% 2% 5% 12% 22% 34%
Adjusted Kulim price 4.00 4.16 4.30 4.60 5.00 5.50
Intrinsic value of Wc 0.87 1.03 1.17 1.47 1.87 2.37
Premium 18% 0% -12% -30% -45% -57%
Gain in WC -16% 0% 14% 43% 82% 130%
Wc at RM1.03, Kulim at 4.09 on 29th December 2012
The table shows the effect of movement of the price of Kulim after the special dividend, assuming at 4.09. For example, if one buys Wc at RM1.03, if the adjusted price of Kulim moves up to RM4.60, the intrinsic value of Wc would be RM1.47. Investors who have bought Wc at RM1.03 would make 43% if convert to Kulim and sell in the market. Whereas people invested in the underlying share only gain 12%. If the adjusted price of Kulim goes down just 9 sen to RM4.00, or 2%, warrant holders would lose 16%, 8 times more. The breakeven point for investors who buy Wc at RM1.03 would be Kulim’s adjusted price at RM4.16 as shown.
So which is the more likely scenario, and why do you think so? All opinions are highly appreciated.
kcchongnz thank for you for sharing this infor . it very make sence and detail i like it hope you can continue provide such useful infor for all of us........ keep it up
Ooi, thanks for your info on Gamuda Wd. Yeah, due to the gearing of the warrant, one may get better return from the warrant than the underlying share. This is provided the trend of Gamuda share price is up, and not down in the future. Ooi, could you tell me where can you get the historical volatility of a stock? I used to get from a CIMB website but now I can't access to it now. Working out sigma from the movement of the historical share prices would be a tedious thing to do.
Ooi, thanks for the link for the Black-Scholes option pricing. This is useful for many people. My only comment is it should incorporate a dividend yield because dividend affects option price quite significantly. For the benefits of other people, theoretically volatility used is the standard deviation, sigma, of the return of a stock. It is calculated from the historical prices of the underlying stock. 3 month, 6-month or 12-month prices? I don't know which is more appropriate. Different stocks would have different volatility. For example stocks like Tiger, XOX, Amedia, etc would have volatility something like 70%, 80%, or even 100%. Stocks like Armada, YTL etc may have sigma of 10%, 20%. Again the historical volatility is not constant. Plucking in a different value of sigma, even if it is just 5% different, could have a large change in the option value. There are numerous other assumptions such as rationality of investors etc which are not realistic. So my opinion is this option pricing thing is far from the real world. I only use it as a guide, a very rough one to get the option value.
If Volatility > 60%, it is no longer a good stock to buy warrant, it means warrant price is too high. My rule is Volatility < 40% is the best. Sometimes, < 60% is still ok with me. I prefer < 40%.
The correct term for volatility is Imply Volatility. I will not use it here to confuse with Intrinsic value.
hw0706, this was what i wrote in another thread for your information and comments' Posted by kcchongnz > Dec 30, 2012 02:20 PM | Report Abuse X
Is YTLP at 43.5 sen now good to punt? Shirley1 suggested so. her reason is because of the likelihood of privatization of YTLP. I just reiterate that the value of YTLP Wb consists of two parts; its intrinsic value and the time value. Intrisic value is straightforward which is equal to Share price of YTLP less the exercise price of WB which is equal to 1.59-1.21 or 38 sen. Warrants having along time to expiry like YTLP Wb (5.5 years) has a big part of its value in time. What happen if YTLP is privatized? Wb will lose all its time value, leaving behind only the intrinsic value. The following table may serve as a guide whether it is worthwhile to punt on Wb based on this privatization theme. YTLP 1.50 1.60 1.70 1.80 1.90 2.00 Intrinsic value 0.29 0.39 0.49 0.59 0.69 0.79 Gain -0.145 -0.045 0.055 0.155 0.255 0.355 Gain% -33% -10% 13% 36% 59% 82%
You can see that if YTLP is privatized at 1.80, the intrinsic value of Wb is 59 sen. One who punt on Wb now at 43.5 sen now would make a profit of 15.5 sen, or 36%. If the privatization price is 1.60, the IV of Wb is only 39 sen. He will lose 4.5 sen, or 10%. so if there is a privatization, what would you think the price would be? This would show how much you would make as shown in the table.
WCT company warrants (30/12/2012) There are three company warrants issued by WCT. The exercise price, expiry date and the current price of each warrant is listed in Table 1 below, along with their intrinsic value and the respective premium/discount, implied volatility and gearing to the warrants: Table 1 Warrant Price Ex-Price Exp date Intrinsic value Premium Imvol Gearing Wb 0.355 1.85 22/04/2013 0.530 -7.4% NA 6.7 Wc 0.425 2.04 10/03/2016 0.340 3.6% 14.4% 5.6 Wd 0.325 2.25 11/12/2017 0.130 8.2% 12.9% 7.3 WCT at RM2.38 on 20th December 2012 Imvol is implied volatility. It is that value of the volatility of the underlying instrument which, when input in an option pricing model will return a theoretical value equal to the current market price of the warrant.
Which warrant would you buy if you are bullish about WCT, and why?
KLSE is a bear market for the last 9 months, hence we have many undervalue warrants to buy. Thank you Kcchongnz for good job done to provide WCT warrants.
I suggest we buy WB first, once it is expired, we change to WC.
We want to buy warrant, the first most important criteria is the price of mother share WCT must be up trending and going up. If the price drops, all warrant holder will lose money. Are you sure the price of mother share WCT can go up ?
Looking at the chart, WCT is up trending and the trend is strong. Likewise, WB. Final decision is yours.
Fortunately I didn't buy Kulim-WC when its price was hovering between 1.04-1.06. In any case, does anyone know how long does it take to convert a warrant into shares? I'm in the dark. The last time when I had warrants, I sold them for a profit. I don't think it is wise to buy Kulim-WC now even at 0.99/0.995 and mother share trades at 4.95/4.96.
"By themselves, share-price movements convey no useful information, especially because prices can move in all sorts of directions in the short term for completely unfathomable reasons. The long-run performance of stocks is largely based on the expected future cash flows of companies attached to them - it has very little to do with what the stock did over the past week or month.... Most of us should be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the future." -- extracts from "The Five Rules for Successful Stocks Investing" by Pat Dorsey.
New Insight Sabah, fully agreed with you. But I think you are talking about investing in a company and its stock. You focus on its business, its operating efficiencies, its growth potential and try to value the business, and then see if you can buy its stock at a price with a comfortable margin of safety from its intrinsic value. That is the whole essence of value investing talked about by Pat Dorsey in his book. In this thread, although we are talking about prices of the three warrants of WCT, we are actually trying to do a fundamental analysis on which one represents the best value to invest. The value of a warrant derives from the price of its underlying share price. So when we talk about prices now, we are actually focus on value. Agreed?
Please note that I will conduct a gathering for my students on Thursday (3/1/2013) from 6.30 pm to 8.00 pm at Gtower. The subject of discussion is "How to calculate premium/discount of a warrant"
This gathering is a free one and I had convinced SharesXPert management to open up this gathering to the public inclusive of investors from I3Investor.com. However, the seats are limited to 100 on first come first serve basis. To avoid disappointment, please call tel : 603-21813118 or 0122751258 to book your seat.
I will also cover worldwide Markets outlook and KLSE market outlook
Yes, my preference would also be Wb. It is still trading at a discount of 6.4% now at 36 sen, while WCT is trading at 2.36. Imaging if we buy Wb, send for conversion and sell the converted share at 2.36 (assuming the price of WCT stays the same), we would make 15 sen, or 42%, just like that in two weeks! Why like that one? Of course one has to come up with quite some money (1.85 per share) to convert and there is this execution risk, whether WCT still stays at 2.36 when the converted share comes back. But this we have been talking about it long ago. Two months ago when WCT at about 2.30 and Wb at 24 sen; one month ago when WCT about the same price now and Wb at about 30 sen. If we have bought and carried out the conversion, we would have the converted shares back long ago. And imagine if we sell the converted share now at 2.36 now, how much we would have made? Is this big fat frog still jumping around? The next more attractive warrant, I would agree with Ooi and tc2012, Wd. Sometimes it is difficult to judge which one is better when they have different premium and expiry date and gearing. For example, Wc is trading at a premium of 3.6%, less than half the premium of Wd. But Wd has a longer expiry date and higher gearing. So which is better. Then normally I look at the implied volatility obtained from the option pricing model. Theoretically implied volatility would have taken into account of everything. Wd has a lower implied volatility of 12.9%, lower than that of Wc of 14.4%, albeit not much of difference. That means Wd is selling at a lower implied volatility, or lower price. The intuition is that having a longer expiry date, Wd has a higher chance for WCT to go up higher in price to give a bigger payoff.
Good work KC. Very educational. But how long does it take to convert warrants into shares. I know next to nothing about warrants. Most people tell me they never convert them.
necro, why Perdana warrant? What do you see in the warrant, its premium, implied volatility, gearing, prospect of the underlying share? If you wish others to comment, could you provide the required information such its exercise price and date of maturity.
Ooi, wonderful wonderful. Thanks for the link for option pricing. I was using a downloaded spread sheet from another link all this while. The answers given for value of option, implied volatility etc are almost identical. They should be anyway because the model is the same. Yours has added advantages. I don't have to do iterations to get the implied volatility for one, and the other is the readily available table showing the movement of option values with respect to the underlying share price (and with all the Greeks too), which I have to do it myself from my previous spreadsheet. All these functions are very, very good. For those people who want to invest/punt in options, this table is the one to use. Now that left one more thing I need to get from you Ooi. How to get the historical volatility of a stock in Bursa. Which link? Thanks in advance.
Ooi thanks for the information. Now I really got someone to check if what I was doing is correct or not. Just to clarify something here. First of all, are we having the same understanding here about volatility in option pricing? Historical volatility of a stock is the standard deviation of return of the stock. This is obtained by doing a statistical analysis of the prices of the stock, 3-month, 6-month, a year,or whatever, and determine the standard deviation, and that is the volatility. When you input this volatility of the underlying share in the option pricing model, it gives you the value of the option, or warrant. Implied volatility is that value of the volatility of the underlying instrument which, when input in an option pricing model will return a theoretical value equal to the current market price of the warrant. Hence when an option is trading at a volatility below its historical volatility, it may seem that the option is under-priced. The second thing is whether an option is American style or European style is whether you can exercise it before expiry date. In this case, American style can but not the European style. Hence in Bursa, company warrants are usually American style. Whereas all call warrants issued by investment banks are European style because you can't exercise the option before expiry date. Am I o the right track?
Aren't you being simplistic in explaining implied volatility?
"... the conventional belief is that investors and traders should look only at the warrant with the lowest implied volatility. But this is only true if the issuer buy back their warrants at a proportionate volatility level. To illustrate, one is better off buying a warrant at a volatility of 60%, and sell it back to the issuer at 55% than to buy a warrant at a volatility of 40% and sell it back at 30%.
"The key issue that a warrant trader needs to consider when looking at volatility is not necessarily the absolute level of the volatility the warrant is priced at but rather the level at which the issuer is willing to buy back the warrant. This means consistency in managing volatility on the issuer’s part. Some issuers will change implied volatility intra-day whilst others hardly ever make adjustments. Recall that theta/time decay is one of the often-ignored Greeks in warrants and yet it can be a silent killer." - extracted from http://www.shareinvestor.com.my/?action=page&id=article6
Title is promising warrant. Does it mean call warrants issued by Brokers, or Company issued warrants ?
Buying call warrants cheaply when underlying share is very oversold can be advantageous.,e.g. Air Asia -CW at one cent.( 1 sen only )The most you lose is RM100 for 10k. However, if Air Asia recovered during the time before maturity, you can make a bit. However, one has to be informed and know how to evaluate the call warrants.
For company warrants, IJM-WC at RM1.18 and Gamuda-WD at 0.95 could be a good choice and it is oversold. IJM has got Properties, Plantations, and tolls plus construction works.
thank you kcchongnz & Ooi Teik Bee on your opinion on WCT warrants. I would definately go for WCT WD, cheaper price, longer period to RIP & the really good returns based on the assumption that WCT will be moving higher. 5 years to RIP is a long period to invest for good returns & who know if by mid 2013, WCT moves higher to $3.20, ha ha ha
Quite confident WCT will move towards $3++ when KLIA2 opens in mid 2013. I will be collecting more as time moves on & tomorrow onwards I will start my collection.
investor77, I bought AirAsia CW at 4.5 sen a couple of months ago and it is only 1 sen now. Lost my pants. But anyway I agree with you CW is an exciting punt for 1 sen when AirAsia is 2.74 now. Though it is deep out-of-money and trading at a premium of 26%, it still have 4 months to expire and the gearing is very high at 68 times. Buy say 100000 at just RM1000 and prepare to lose all. But if you strike pay dirt, say something very positive about AirAsia comes out soon the return could be huge. Also agree with you about IJM Wc that if IJM shares is really oversold and undervalued as mentioned by you, Wc may be a better bet than IJM because of the gearing of 4 times. At 1.19 and mother share at 4.98, the premium is also undemanding at only 4.2% while it still has 22 months before expiry.
bingo you have your valid reasons for liking Wd. But don't you agree that the bird in your hand is better than two in the bush? If you buy Wb now and convert and sell the converted share, you straight away get the 40+% return in two weeks as described before. In contrast, you only think that WCT can go up to 3++ in the future. Of course you have 5 years for this to happen to reap the profit. 5 years is a long time. I guess it is the confidence you have in WCT. But why not follow what Ooi said, buy Wb now. Reap immediate profit now. Then buy Wd?
KAHFIEHLAI, For example if you want to find the implied volatility of WCT Wd, key in the data in the model: share price 2.36 dividend yield % 2.9 maturity 4.4 years (approximately) strike price 2.25 interest rate % 3.5 calculate highlight implied volatility and key in option price of 0.29 Press calculate and you get implied volatility value and even the time and intrinsic values of the option.
Dear Kcchongnz TQVM,Can u help to clarify the following.
Instrument Type : Warrants Description : Issuance of 180,000,000 free warrants in SKP Resources Berhad (“SKP”) (“Warrant(s)”) on the basis of one (1) Warrant for every five (5) existing ordinary shares of RM0.10 each in SKP (“SKP Share(s)”) Issue Date : 27/06/2012 Issue/ Ask Price : Not Applicable Issue Size Indicator : Unit Issue Size in Unit : 180,000,000 Maturity Date : 27/06/2017 Revised Maturity Date : Exercise/ Conversion Period : 5.00Year(s) Revised Exercise/ Conversion Period : Exercise/Strike/Conversion Price : MYR 0.4500 Revised Exercise/Strike/Conversion Price : Exercise/ Conversion Ratio : 1 Warrant:1 new SKP Share Revised Exercise/ Conversion Ratio : Mode of satisfaction of Exercise/ Conversion price : Cash Settlement Type/ Convertible into : Physical (Shares) Remarks : Each Warrant carries the entitlement to subscribe for one (1) new SKP Share at the exercise price subject to the following step-up mechanism:
(i) upon issuance of the Warrants up to (but excluding) the second anniversary of the issue date – RM0.45 per SKP Share;
(ii) exercise at any time on and from the second anniversary of the issue date up to (but excluding) the fourth anniversary date – RM0.55 per SKP Share; and
(iii) exercise at any time on and from the fourth anniversary of the issue date up to the maturity date of the Warrants – RM0.65 per SKP Share,
subject to the adjustments in accordance with the provisions of the deed poll dated 11 June 2012, constituting the Warrants. Any Warrants not exercised during the exercise period (as indicated above) will thereafter lapse and cease to be valid for any purpose.
Thanks KCC for your response. As I don't know anything about warrant trading, I'm trying to learn as much as I can. Ooi says in one of his postings, "My rule is Volatility < 40% is the best. Sometimes, < 60% is still ok with me. I prefer < 40%." And then subsequently he says, "You cannot buy warrant or option if Implied Volatility is > 40%, it means that the price of warrant is no longer cheap. The rule is Implied Volatility must be < 40%." And then I found a fantastic article on warrants at shareinvestor.com.my which somehow contradicts the discussion here and so I posed the question with the relevant extracts. I must admit I'm confused by Ooi's comments. While I'm at it, I'm also a bit confused over his statement that "charts don't lie" and at the same time he tells us that charts do give us "false signals". This is all very contradictory and confusing to me. Unless of course the fault lies in me in not able to understand my native language.
KAHFIEHLAI, it appears that the exercise price is not fixed. It depends on when you exercise the warrants; the earlier you exercise, the lower is the exercise price. It encourages you to exercise earlier.
Thank You Mentor Ooi for the reply. From chartnexus charts, Plantation shares on rebound. Can we use Tech Analysis, e.g. RSI to gauge which shares can rebound faster? Sometimes, a share after Break Peak, more often than not, it retraced back, e.g. PresBhd.
Before plantation downturn, R Sawit and TSH are investors favourites. Thus, worth to try these two shares ? Your opinion is highly valued.
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Posted by kcchongnz > 2012-12-29 18:58 | Report Abuse
I start with one first, Kulim company warrant, Wc At the close on 27th December 2012, Kulim and its warrant Wc closed at RM4.82 and RM1.01 respectively. Subsequently Kulim announced a special dividend of 91 sen. The next day Kulim share price as expected jumped to high of RM5.20 before closing at RM5.00, for a gain of 3.7% for the day. On the other hand Wc jumped to a high of RM1.09 and closed at RM1.03, or a gain of just 2%. Wc has a gearing of 4.8 times, a delta of 0.67 (delta from option pricing model) and hence an effective leverage of 3.2 times. Why didn’t the price of Wc closed at approximate 12% gain, or 3.2 times the gain of Kulim theoretically? Is there a chance to profit from this anomaly? Bursa last night announced that the revision exercise price of Wc to be adjusted from 3.83 to 3.13. Now we put aside all the price performance of Kulim and Wc and analyse to see if Wc is indeed a good investment basing on the price movement of Kulim. At yesterday’s closing price of Kulim and Wc at RM5.00 and RM1.03 respectively, the intrinsic value of Wc is RM1.87 (5.00-3.13), or 82% over its present price of RM1.03! I could buy Wc on Monday, send and pay RM3.13 for conversion at a total cost of RM4.16. I would enjoy the special dividend of 91 sen. Even if Kulim share price drop back 91 sen, the amount of special dividend, the share would still worth RM4.09 (5.00-0.91)! So my gain would be 91 sen per share, or 22%! Another big fat frog jumping all around? Dream, dream, dream, dream.m.m. But then without dreams, nothing will ever come through, will it? First of all, if you are not already possessing Wc, you have no chance to enjoy the special dividend of 91 sen, because as expected, the management of Kulim has already pre-empt it. Secondly price of Kulim may have already run up even way before the announcement due to the action of insiders, and so Kulim may be, I said may be, overpriced already. Thirdly there will be an adjustment of the share price of Kulim after the ex-date of the special dividend. So everything depends on whether there will be further run up in the price of Kulim and what is the amount of downward adjustment of Kulim ex-dividend. This is because the value of Wc depends on the final price of Kulim after the adjustment. So do you think Wc is a good bet? The value of Wc consists of two parts; the intrinsic value and the time value. the intrinsic value is straight forward and is computed based on the following: Intrinsic value IV = Price of Kulim – Exercise price Premium of Wc = (price of Wc+exercise price)/price of Kulim-1 Gearing = Price of Kulim/Price of Wc Assuming that we adjust the share price of Kulim, now at RM5.00. With the special dividend, the adjusted price of Kulim is RM4.09 (5.00-0.91). Then IV = RM4.09-RM3.13 = RM0.96 Premium = (1.03+3.13)/4.09 – 1 = 1.7% Gearing = 4.09/1.03 = 4 Hence after adjustment of special dividend of 91 sen, Wc still has an intrinsic value of 96 sen, and it is traded only at a premium of 1.7%, with a gearing of 4 times. Have we forgotten something else? Yes, the time value of Wc. Using Black-Schloes OPM, with the assumption of historical volatility of Kulim at 25%, dividend yield of 3%, and the risk free rate of 3.5%, Wc is worth RM1.20. 17 sen, or 16.5% above its present price of RM1.03. The 4.5 years of time value of WC is then equal to 24 sen (1.20-0.96). The following table shows the intrinsic value of Wc (ignoring the time value) with different adjusted price of Kulim after the special dividend: Gain in Kulim -2% 2% 5% 12% 22% 34% Adjusted Kulim price 4.00 4.16 4.30 4.60 5.00 5.50 Intrinsic value of Wc 0.87 1.03 1.17 1.47 1.87 2.37 Premium 18% 0% -12% -30% -45% -57% Gain in WC -16% 0% 14% 43% 82% 130% Wc at RM1.03, Kulim at 4.09 on 29th December 2012 The table shows the effect of movement of the price of Kulim after the special dividend, assuming at 4.09. For example, if one buys Wc at RM1.03, if the adjusted price of Kulim moves up to RM4.60, the intrinsic value of Wc would be RM1.47. Investors who have bought Wc at RM1.03 would make 43% if convert to Kulim and sell in the market. Whereas people invested in the underlying share only gain 12%. If the adjusted price of Kulim goes down just 9 sen to RM4.00, or 2%, warrant holders would lose 16%, 8 times more. The breakeven point for investors who buy Wc at RM1.03 would be Kulim’s adjusted price at RM4.16 as shown. So which is the more likely scenario, and why do you think so? All opinions are highly appreciated.