Call Warrant updates as at December 13

While I have no intention of re-naming this blog as the "NextCallWarrant", I would certainly run this risk if I post too often on this sector. Nonetheless, I will take that chance because I like to point out that the last 2 days of sharp correction (i.e. yesterday & today) has unearthed a potentially attractive trading situation for the entire sector.

Assuming for a moment that the correction in the market has gone too far & therefore overshot some uptrend lines or moving averages that technicians had drawn or plotted and thus triggering the many bearish calls currently out there (including this blog). Why the overshooting? This is not unusual under the normal 'reversion to mean' where the market corrects its recent sharp run-up.

Next, assuming that after this current sharp correction, the market re-establishes its prior bullish move quickly. What do you think would be the best performing sector(s) in such a recovery scenario? Of course, one of them must be the call warrants because, firstly, they have dropped substantially; secondly, their recovery will be spurred on by the usual stronger blue chips' recovery; and, finally, their potentials are well-recognized by market players (including, I suspect, hedge funds). Yes, this is a 'high risk, high reward' trading situation.

Now, let's look at a sampling of call warrants & see how deep has the last 2 days' correction been. We can see from Table 1 below that 3 of the 5 call warrants have re-traced back 50% of their prior move. For example, Astro-CA has risen from RM0.20 to its recent high of RM0.80; thus, gaining RM0.60. If it re-traced back 50% of this gain, it will fall back to RM0.50. Its 20-day Simple Moving Average support is at RM0.50. It closed at RM0.51 today. Thus, buying Astro-CA is a good proposition because its chances of recovery is fairly good if the current market correction is a short one or it has almost run its full course.


Table 1: A sampling of call warrants' recent price movement.

The call warrants' prices dropped 10.19% today as compared to a 0.58%-decline in the underlying share prices. After 2-day of sharp drop in call warrants' prices, the average premium has finally declined from 13.28% to 11.64% (see Table 2 below).


Table 2: Changes in Call warrants' prices, underlying share prices & premium from Dec 12 to Dec 13

The usual Call Warrants update is posted here for your easy reference. The cheap call warrants are highlighted in yellow while 2 call warrants that are due to expire in January 2007 (i.e. Astro-CA & Scomi-CA), have their expiry dates highlighted in pink and the 4 call warrants that are due to expire from February to April 2007 (i.e. BJToto-CA, Bursa-CA, IOI-CA & TM-CB) have their expiry dates highlighted in orange.


Table 3: Call warrants' intrinsic value & premium as at Dec 13

In conclusion, we can see that the call warrants, which were the best performers in the recent market rally, are now bearing the brunt of the current market correction. As noted, the time may be right for some tactical accumulation (read: trading buy) of this potentially oversold instruments.

Note: This recommendation contradicts with my earlier recommendation to 'avoid the call warrants for a while'. The earlier recommendation is based on standard technical approach (such as 'sell if an uptrend is broken') while this current one includes some assumptions, which are clearly stated above, that may or may not materialize.