| Naga Golden Rule 3 |
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Setting Take-Profit, Stop-Loss and Time Frame
When you trade warrants, you may need to adopt a different approach trading shares. Your time horizon and risk appetite could determine whether you should be trading either warrants or shares.
A share has an infinite life whereas a warrant has a limited lifespan. As a warrant holder, you should regularly monitor your warrant’s position, at least on a daily basis.
Stop Loss
You should establish the maximum level of profit that you could obtain or loss that you could suffer before selling your position. Some speculators stop loss after their warrants have dropped by a certain percentage (say, 15% stop loss level) of the warrant price. This is usually a guideline for some speculators as to when they should sell their warrants. A stop loss level could help you take the emotion out of an exit strategy.
Three Strategies |
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| 1. |
Set a Take-Profit Target
You could take profit once the warrant hits your target. If you are confident on the upside of the warrant, you can choose to sell some of your warrants first and the rest at a later date. Alternatively, you could opt for outright exit on all your warrants after a take-profit target has been reached. |
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| 2. |
Set a Stop-Loss Level
You should exercise discipline in setting a stop loss level as an OTM warrant will expire worthless. Never try to cost-average your position by buying more and more of the same warrants when the underlying price slides further down to reduce the average price per warrant. Instead of cost-averaging, you would have to recognise that you have got the trade wrong and exit. See the example below on the effect of cost-averaging. |
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(example) |
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Underlying |
Exercise ratio |
Warrant Price |
Effective Gearing |
No of warrants |
Cost |
Exposure to
underlying share |
| First purchase |
ABC |
5 warrants : 1 share |
RM0.075 |
10 times |
50,000 warrants |
RM0.075 x 50,000
=RM3,750 |
50,000 x 10 times
5 ratio
=100,000 shares |
| Increase stake |
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RM0.05 |
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30,000 warrants |
RM0.05 x 30,000
= RM1,500 |
30,000 x 10 times
5 ratio
= 60,000 shares |
| Total |
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RM3,750 +
RM1,500
80,000
= RM0.065 |
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30,000 warrants |
RM3,750 + RM1,500
= RM5,250 |
100,000 + 60,000
= 160,000 shares |
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Investor A has increased his ABC call warrants from 50,000 to 80,000, thereby increasing his exposure risk by 60%. If Investor A were to lose the entire investment, his loss would escalate by 40% (from RM3,750 to RM5,250). |
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| 3. |
Set a Time Frame
How long do you plan to hold the warrant? Once the time frame for your investment elapses without the desired gain, you should opt to exit in order to limit future losses due to the time decay of the warrant. |
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| Naga Golden Advice |
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a. |
Never be emotionally attached to your position, cut your losses instead of irrationally holding on to a losing position. |
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b. |
Set a Take-Profit Target, Stop-Loss Level and Time Frame before trading. |
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c. |
Stick to those target levels under all circumstances. |
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d. |
Buying more to average down is never a good idea. It will only expose you to more risks. |
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Warrants Basics
