| Naga Golden Rule 1 |
|
|
Timing, Pick a Comfortable Level
A warrant is a financial instrument, its value derived from the underlying asset. Therefore, to identify a warrant’s buy signal, you must first study the price movement of its underlying asset.
The perfect buying time
The perfect time to buy a warrant is when the underlying asset is about to make a sharp gain (for a call warrant) within a short time frame. At this point of time, the gearing effect of a warrant comes into full play.
There are warrants with different maturity periods and exercise prices to match your expectations. If you expect the market to experience a big swing, choose a warrant with a shorter time to maturity and far OTM, as this will give you a good leverage effect.
You should also study a warrant's historical volatility (a measure of price fluctuation of the underlying asset over time) and implied volatility (market expectation on the future price fluctuation of the underlying asset) for a buy signal. For example, if you expect an upward trend in the historical volatility of the underlying, this could be a buy signal for a call warrant.
The graph below illustrates the correct timing of buying and selling a call warrant to take profit or to cut loss.
Diagram 4: Price chart of a call warrant |
|
 |
|
| Scenario illustration: |
|
| BUY 1 |
Investor A buys call warrants when the market is trending up on positive measures taken by the U.S. government. |
| SELL 1 |
He sells call warrants as the share price reaches the top of the trend channel. |
| BUY 2 |
Buys again as he is confident on the quarterly result announcement of the company. |
| HOLD |
Investor A holds the call warrants in anticipation that the company will be a major beneficiary under a government stimulus package to revive the economy. |
| SELL 2 |
Cut Loss as the share has broken its uptrend channel. |
| BUY 3 |
Investor A believes that retracement is overdone, share price consolidating at RM0.80 and ready to re-test high of RM1.10. |
|
|
|
|
Warrants Basics
