Call Warrants- A highly leveraged tool

Today, one can find a lot of materials about call warrants. You can go to OSK188.com or CIMB Warrant Portal for information on upcoming CWs, their terms & conditions as well as the current pricing of CWs traded in the market, etc.

When I first started my coverage of CWs, the level of awareness & publicity was much lower. I've stated that "one of the reason why I track call warrants is that there are currently very few warrants issued by blue-chip companies. The only warrants that allow investors to benefit from a blue-chip rally are the call warrants (eg. Genting-CA; Maybank-CA & CB; Tenaga-CA & CB; TM-CA & CB etc)." When I looked back on my first post (here), I feel quite sad that only a handful of my clients had invested in CWs.

Nevertheless, I must say that the CWs issued today carry a much higher risk than the earlier CWs because of their short tenor (normally 6 months for the new CWs compared to 2 years for older CWs) and their high premium. When a CW is issued at a premium of 10% (or, more) after the underlying share price has appreciated considerably in the current bullish market condition, the chance of the CWs expiring "outside-the-money" is greater. The losers will be the buyers of these CWs while the winners will be the issuers. Of course, nobody knows how high a share can go and that's where the attraction lies for these CWs. In a frantic market like now, retail players are likely to be drawn in for the easy moneys that can be made in the current CWs play.

Here, I like to highlight the percentage decline amongst the CWs after the market peak in December 12, 2006 (see the table below). From December 8 to December 19, the underlying share price dropped by 4-5% while the CW dropped by 33-34%. The numbers are based on a simple addition of the individual drop for the periods concerned & is likely to understate the percentage decline for both the share price as well as the price of the CWs, but I think it would suffice for our demonstration here. The point that I've made in my first post is very pertinent i.e. "call warrants cannot be ignored by the more sophisticated investors because of the leverage afforded for a given amount of funds. Leverage is however a double-edged sword; you may make higher return, but you may also make bigger losses."



Note: On December 19, when the market rebounded, the CWs gained 15.35% as compared to a 2.29%-gain in the underlying share price.