Monday, 26 February 2018


On February 22, we were down heavily on a trade. Our paper loss was somewhere to the tune of RM4,000. A part of us thought we were making a terrible mistake due to the usual reasons; arrogance, failure to cut losses, overtrading, a fixation on trading the technicals, et cetera.

When we first began trading about four years ago, such a situation would probably be accompanied by the three -tions : perspiration, palpitations, and constipation. Nausea and visions of homelessness would ensue.

 Ever lost money in stocks? You know that feeling.

Then, on February 24, my position rebounded significantly. The final result was a 40% profit; it's one of those short term high-yield trades I've written about here.

Was it skill or luck? It could really be either. The only elements of skill that we're aware of from this trade was:

1) My EXECUTION in terms of entry price, analyzing the price/volume activity, managing the position and exiting the trade.

2) The CONVICTION to stay in the trade at its lowest point.

3) Prior EXPERIENCE with this type of stock price behaviour. Or to put simply, my homework.

4) An understanding of the RISK-REWARD probability and the acceptance of higher-than-normal losses if the trade fails.

For your benefit as much as ours, we will try to articulate the thought process that went through this particular trade. In any form of investing or trading activity we have zero control over the movement of stock prices. We can only manage our own positions, regardless of where the stock goes. A well-planned trade that loses money is better than a profitable one based on sheer dumb luck, since only one strategy out of these two can be sustainable in the long run.

So let's look at a fairly turbulent 24-hour period with the trade itself. The timestamp is reconstructed from TOYOINK's 5-minute price charts and from my own notes.


Toyo Ink Group Bhd came into our radar for one simple reason: it had a near worthless company warrant. On February 23, 2018, the mother share staged a serious rally from 84 sen to breach the RM1 mark. For context, it closed at 78 sen the day before, so its intraday maximum price limit was RM1.08 (a 30 sen increase).

For reasons that remain unknown at the time this article is out, the company is seeing renewed trading interest. One could attribute it to its upcoming earnings disclosure, but no one knows for sure. The company is a not-very-profitable ink manufacturer that is venturing into power plants.

 My attempt at fundamentals research burst into flames before it even started. Link here.

This is a trade that does not involve fundamental analysis, although one metric does help - the asset heavy company carries a net asset value (NAV) of RM1.09, and its stock has been trading at a 50% discount of that for a very long time. At least the upside is partly justified from a valuations perspective.

TOYOINK-WA is a company warrant that expires this year. Its exercise price is RM1.50. With the mother share trading at 55 sen earlier this month (and  being totally illiquid - until recently), the warrant's near worthlessness was justified. But the quick rally to RM1 changed all that.

The higher the stock price, the greater the likelihood that the warrant may actually be worth something. The concept of time value is a very important thing to understand when trading warrants or investment bank-issued call warrants. This is why TOYOINK-WA  rose 1,900% in one day.

9:30AM : The warrant rises from 0.5 sen to 5 sen. That's a 900% gain. My thoughts were : "is everybody out of their minds?". The mother share rises to a peak of 99 sen. That's already a 26% increase from the day before on low liquidity.

We try to visualize different scenarios: could TOYOINK go as high as its limit up price (RM1.08) today? (very likely) What's going to happen to the warrant - will it go up further? (it might but imagine how bloody hard it is to enter a position after it's up by 900 percent).

Mentally our game plan is set : in these kinds of trades it always helps to be reactive, not proactive. I'd initiate a position if the warrant breaks 5 sen. If this happens, there's a chance it can be one of those 'black swan' trades in which prices can increase tenfold under the right circumstances (more on this later).

10:50AM : TOYOINK-WA hits 10 sen within 10 minutes. It was time to react. The mother share hits RM1.04 and was close to the limit up.

In my mind we're anticipating either one of the following scenarios:

1) Share price hits limit up and gets stuck there as new buying volume arrives. There was nothing left to trade but the warrant, so its potential for further price increases are magnified.

2) Share price hits limit up but retreats back to the RM1 range or below on profit taking. This could negatively impact the warrant but the existing volumes suggests an inclination of price stability, and perhaps a price increase.

Another Google search goes awry - TOY OINK?

11:05 to 11:20AM: Bought 100,000 warrants at 12 sen. Then another 50,000 at 12.5 sen. Immediately the warrant rises another 5%. I ended up buying 47,000 more at 14 sen. At this point we were anticipating a potential move towards 20 sen - it seems farfetched but the sheer trading activity at the time was enough to make this a possibility. Stupider things have happened in the markets.

11:25AM : The warrant peaks at 14.5 sen. So does the mother share - it briefly hits RM1.08 but immediately fell to RM1.03. Scenario 2 is the likelier possibility now. The warrant declines to around 12 sen, already a paper loss for me due to the trade taken at the 14 sen mark.


3:15PM : The warrant looks shaky as it hovers between 11 sen and 12 sen. We ended up cutting the position by more than a third at 11.5 sen (77,000 warrants). Acceptable losses. At this point the total volume for TOYOINK-WA was at more than 100 million warrants traded - who's accumulating and why? Can it resume the rally tomorrow? (at this point I gave this a much lower probability than the stock just collapsing).

4:00PM : The warrant recovers from 10.5 sen to 12 sen quickly. We made a pivotal call to increase our exposure by 50,000 warrants at 12 sen. The price stability and high turnover is suggestive of a continuing rally; this is purely based on my past observations of similar situations, so it's not a gut call. A trader is required to pull the trigger under severe duress, so the decision was made without hesitation.

4:30PM : Surprise! An immediate price retreat towards 10 sen. This was the low point : my position is down by 16% with a net exposure of 170,000 warrants. I had to make a Trump-ian decision : to drop the bomb (sell everything) or not?

We decided to stay put. There were a lot of market signals (ones we can't disclose here) that the warrant can continue its rally. We were a bundle of nerves but we held our ground. We're  completely emotionally detached to our trades; the three -tions haven't happened to us in years.

There is no panic or extreme emotional peaks here; ourconviction was strong enough to stay invested and we bear full responsibility for the outcome of this trade.

4:50PM : It's market closing time. TOYOINK-WA settled at 10 sen. TOYOINK closed the day at RM1.01. It actually bounced back from 98 sen at least four times in the past three hours, suggesting some sort of price support. It could be worse - the stock could've gone back to 80 sen, or the equivalent of a doomsday scenario.


Your conviction cannot be based on pure intuition or 'gut feeling' - that's a one-way ticket to bankruptcy and homelessness. It needs a solid foundation; in my case it was homework. We make our trading decisions based on prior observations of similar stocks and warrants. These are repeated empirical observations; what's happened before can and will happen again, and this is one of our competitive advantages in trading.

A caveat : we don't undertake these kinds of trades often. But we'd do it when we encounter these 'black swans' - basically a rare situation in which a stock/warrant can rise by hundreds of percent in a short span of time. It can be due to mispricing, sentiment, or others, but identifying them is a way of boosting trading returns significantly in any given month or year.

Spotted in the wild : a mispriced warrant

Want some examples? There have been a couple this year and we're only in February. We've written about them here and here (one was up 781% at its peak, the other was up 866%). In our mind we had good reasons to approach TOYOINK-WA the same way. It's mispriced and its time value will become apparent once the mother share rises significantly.

A neat summation : mispricings offers supernormal profit potential. New trading interest will bring the stock to what reasonably constitutes fair value. An overshooting in sentiment can lead to short term upside shocks; this is when the profit potential becomes abnormal. Conceptual thinking and practical execution is required to undertake such a trade.

The worst thing to do would be to treat TOYOINK-WA as a gamble.


To make 40%, 80%, 100% profits you have to be willing to risk 15%. There are no easy lunches or low risk high-reward situations. Several profitable trades of this magnitude can make all the difference in your capital position. I firmly believe that such trades are worth hunting down; they can make all the difference in the world.

9:00AM : We were fully prepared to cut my losses if everything goes south. The warrant holds steady at 10 sen on fairly heavy buying volume. The mother share hovers between 98 sen and RM1 for about 15 minutes.

9:15AM : TOYOINK-WA suddenly experiences a drastic surge. It quickly rises to 12 sen, or a 20% gain from the opening price. Heavy buying volume hits the mother share too; now it's well-supported at RM1.01. A rally is imminent.

9:25AM : We decide to increase our exposure by 50,000 warrants. In the ensuing rally we only managed to get 30,800 filled from the order; it's usually a good sign when this happens. The full net exposure is 200,800 warrants at this point. By this time the price hits 14 sen, or a 16% paper profit on my position.

9:30AM : TOYOINK-WA turns out to be a black swan trade. As you can see here:

Warrant goes ballistic: Up 80% from 9:19 to 9:32AM. WTF?

9:25AM : The warrant becomes illiquid beyond the 14.5 sen mark; there's just far more buyers than sellers in this market right now. We're preparing to dispose the entire position beyond my 30% profit target (16 sen) and above. Anything more is just a bonus. By the time it reaches 17 sen we knew from past experience that 20 sen is a distinct possibility. It quickly broke this point.

9:32AM : Sold 100,000 warrants at 21.5 sen. The intraday peak was 22 sen; we were lucky to sell at that price. The buying mania was obvious to us and it was time to exit as there is little upside at this price point. The mother share rises to its own intraday peak of RM1.13 around this time.

9:38AM : Sold the remaining 100,800 warrants at 18 sen. Overall profits of 44% were beyond initial expectations.

And that's it. We're completely out of this trade with no intention of returning to it. There is no happiness, giddiness or slap-on-the-backs here. It's time to move on to the next trade.

Monday, 19 February 2018


When you open a trading account, it's most likely that the following scenario has played in your mind on an endless loop : I can't wait to buy a stock and make 20% - no, make that 50% - profits in a week. I just need to do this 10 times and eventually my RM2k will turn into RM1 million!

When your broker tells you to buy 2 million shares in that one Sarawak based timber/furniture penny stock company.

Well, we know that's not really how it works. But our minds are predisposed towards over-optimism, especially when it comes to appraising our own ability to make money. Everyone thinks they can beat the market, but they underestimate the challenges that come with trading. Again, if you can't make more than 7% per annum from personal stock investments, don't waste your time - throw your money into mutual funds, fixed deposit, ASB, Tabung Haji, etc.

Over-optimism fuels the capital markets. It compels us into making more and more trades, buying stocks using margin, or putting absolute blind faith in cryptocurrencies. Short term trading for immediate profits will always be the holy grail for those looking to make a quick buck.

But if you're reading this, I'm sure you'd love to make a quick buck, just like me. Having that desire is not inherently a bad thing - repeating stupid trading mistakes and blowing up your capital are bad things.

I experiment with different strategies in my trading approach. Despite my many biases, I try very hard not to discount any and all approaches, be it fundamental, technical, volatility driven, or event driven. I force myself to take extensive notes of all my gains, losses, mistakes, and weird correlations that I see on Bursa Malaysia (which can turn out to be lucrative trading opportunities).

By adopting an empirical process, from time to time I'd come across such a proposition - the opportunity to derive huge short term gains. It's inherently risky, but the risk-reward proposition was such that it's worth entering these types of trades. It's not for the faint hearted.

Let me stress this : the opportunity is there, but the ability to capitalize on it is a burden that falls squarely on the trader. Do it right and you can achieve a 30% return on capital within 48 hours. Do it wrong and you'll lose just as much, if not more.

With this post I'd like to bust one market myth by showing you that it is possible to derive such gains repeatedly. There are always pre and post-trade justifications, but such short term trading always requires a trader to act with very limited information. The rally precedes the news, or it could be the other way around. Sometimes it's purely technical - no news necessary.

The real art is basically scenario analysis backed by empirical research - have I seen this situation before? If I can reasonably estimate what's going to happen next, how do I trade? How big of a position should I put in? How long to stay in? When do I get out? Am I going in at a good price, or a stupid price?

Here's the burden - you have to answer these questions intuitively, and very, very quickly. Short term trading to make a quick buck isn't the result of pure speculation or dumb luck - it comes from painstaking research and homework.

Eight months of trading on my journal from last year - around 120 days' worth of entries out of 160 trading days during this period. One square represents one/two pages of extensive observations and comments.

But enough of that. Let's look at some examples. I'll explain the trades as best I can. These are trades lasting two days at most, so 12 hours maximum (if you count only the trading hours, excluding market breaks). RGL = realised gain/loss. Shown below are absolute net profit values (before fees) and percentage gains from capital invested, or ROI. I usually have a profit target of 30% on higher risk short term volatility trades.


DURATION : Two days.

PRE OR POST-TRADE JUSTIFICATION? : Pre. I didn't need the news to enter this trade. It was mostly down to price activity.

DESCRIPTION : My only significant edge in this trade is that I've been waiting for Hibiscus call warrants to come out (as a general rule, a stock must carry an average market cap of at least RM1 bil over three months until an investment bank would consider issuing the calls). Another significant factor was that the firm's shares have been steadily declining from a high of RM1.17 on January 16, 2018.

The call warrant, CA, came out on Feb 13, at a time when the mother share has fallen close to a two-month low and a 35% decline from the peak. Mispricing in call warrants tend to happen when the mother share is in a slump; buying them in anticipation of a rebound skews the risk-reward ratio in my favour (low upside, excellent short term recovery prospect). I'm also aware of the fact that Hibiscus is about to post its latest earnings by the end of February. It's good for sentiment if nothing else.

THE TRADE : I bought CA as soon as Hibiscus breaks the all important 80 sen mark (it was at 76 sen the day before). My initial expectation was for the stock to modestly rally to 85 sen over the next week. Instead it went up to 98 sen within two days. For all intents and purposes this was a technical trade - the sudden shift in price and volume activity was all I needed to enter this trade.


DURATION : Two days.

PRE OR POST-TRADE JUSTIFICATION? : Pre. Another purely technical move. But this one was driven by a price breakout (a rally to new highs), unlike Hibiscus-CA which was all about price recovery in the mother share.

DESCRIPTION : I've written about this trade in great detail here, in the final section.

THE TRADE :  I missed out on the great DRB-HICOM rally of January 2, 2018 (the stock went up 23% in a day. One one the call warrants? Up 781%). The anticipation of another breakout was there; all it took was a steady consolidation phase and a supportive broader market. Both were around when the price breakout occurred, and I was ready.


DURATION : Three hours.

PRE OR POST-TRADE JUSTIFICATION? : Pre. The news came out later. Indeed, the stock moved before the CEO opened his mouth - perhaps somebody knew something in advance.

DESCRIPTION : This was on January 23, 2018. Look at that lovely spike on the left; that's the call warrant moving up by 78% in one day (16.5 sen to a peak of 29.5 sen).

So what caused it? The first supportive indicator was the mother share itself. It was trading near all time high levels on the same day. It had been consolidating at around RM9.20 since January 2. Did some positive glove related export data came out? Did the ringgit crash that day, thus improving sentiment towards exporters? No and no.

The only thing that happened was that piece of news in the prior link: the CEO says he will acquire more companies. It was enough to drive the stock nuts. My competitive edge, if you can even call it that, was this. I liked to tell people that I managed to benefit financially from this event despite not attending it.

 Top Glove session, January 23, 2018.

My background in finance journalism means that I'm acutely aware of potential market moving events (this also includes key dates for company EGMs and earnings disclosure announcements). I know that there were instances in the past when these types of corporate presentations were enough to propel stock prices; the disclosure of new and positive information always helps. I didn't know what the CEO was going to say, obviously, and I didn't wait. If I did I would've gone in at a much less profitable entry price.

 Note the timestamp : 3:18PM. I was in the trade in the morning.

So again, all the pieces (somewhat) fit : a good stock, a reasonably priced call warrant, and a possible kicker for the stock itself (the corporate presentation).

THE TRADE : I acquired the call warrant within a few minutes of the mother share breaking a new high of RM9.25. I finished accumulating my position at around 20 sen and sold it at 29 sen (never aim for 30 sen - that's the so-called resistance barrier, as the chartpeople would tell you). The volatility was such that taking profits was a necessary move. I fully understood that this was a one-time occurrence.


DURATION : 1.5 hours.

PRE OR POST-TRADE JUSTIFICATION : Post. On January 30, 2018, when this trade was made, Lotte announced its latest earnings and dividend. In many instances, the dividend component of the earnings disclosure (despite being fully expected - Lotte's dividend policy is 50% of annual profits) tends to propel the stock to new heights, albeit temporarily. The trick is finding a suitable call warrant to ride on this angle.

DESCRIPTION : I was slow to realize the ramifications of the earnings announcement which was made during the afternoon break. In fact, I got in at a lousy position. Had I been more decisive and entered the trade just minutes earlier, I would've stood to gain RM6-7k. This trade was purely news driven, and the volatility was expected to be brief.

The call warrant, CG, spiked from 3.5 sen to 14.5 sen on January 30 - a mind-boggling 300% one-day increase. This was mainly because CG has done nothing but decline since inception; the rally was in reaction to the one-day shift in volatility. Think of it in terms of what happened to the VIX shift recently.

How brief was the volatility spike? Since then the call warrant has gone back down to 3.5 sen as of February 15, so don't bother chasing it. CG has lost 75%, but the mother share is only down 6.5% since January 30. This is mainly because the call warrant is close to expiry and no longer has utility as a trading instrument.

THE TRADE : It was fairly brief and I got in at a lousy price - 11 sen (remember that this was after the call warrant tripled within half an hour). One purely technical indicator was that CG did not immediately touch down below 10 sen, indicating a continuing surge in buying interest. I sold everything at 13.5 sen as my experience with price/volume analysis indicated that the rally will peter out quickly. CG closed at 10.5 sen on that day.


DURATION : Three hours.

PRE OR POST-TRADE JUSTIFICATION? Pre. There was literally nothing driving the stock on December 13, 2017, when this trade was made.

DESCRIPTION : My only advantage in this trade is that I've had Vitrox in my watchlist for four months. I was keen on accumulating a Vitrox call warrant as a medium term fundamentals trade, but the excess volatility meant that this angle had to be abandoned as it morphed into a short term trade. The other main indicator was that the mother share recently recovered from a slump. On this day it unexpectedly broke a new all time high of RM5.91.

THE TRADE : There were several Vitrox call warrants at the time; I was actually observing VITROX-CA, but liquidity considerations (no trading interest in CA) meant I had to scramble to find a substitute. CD fits the bill as it was trading at 16.5 sen from a peak of 24 sen before. A price target of 20 sen was perfectly reasonable in the event that the mother share itself continues to recover.

My approach in this trade was rather conservative, so I ended up missing out on a huge chunk of the eventual four day rally in Vitrox shares. When the share hits RM5.91 you have two choices : take profits before it tries for RM6 or hold on in anticipation of it breaking that price point. Having observed the shares for a long time I was aware that the stock exhibits high volatility tendencies - it jumps around a lot and price stability is never guaranteed.

In the end I sold my warrants at 23 sen, a solid return from my entry price of between 17 and 19.5 sen. In the subsequent days CD actually went all the way to 30 sen. But it's OK - you'll never go broke taking profits when the one-day yield is a ridiculous 37%.


DURATION : Two days. It was sold this morning (February 19, 2018).

PRE OR POST-TRADE JUSTIFICATION : Post. This trade (basically a continuation of (1) ) was a way to stay in Hibiscus following earlier profits. So it is purely technical driven.

DESCRIPTION  : This trade is what is known as 'scalping', or trading the spreads to achieve immediate profits. This basically mean buying in size at one price and selling it off at the next 'tick'. Some people do it in size : buy 1 million warrants at 8 sen, sell it off at 8.5 sen and you'll make RM5k. I saw limited downside based on the existing price of CC, a newly issued warrant.

A warning though : never scalp unless you know what you're doing. In this instance I was perfectly OK with disposing the position at breakeven (8 sen). The profits from this trade was the culmination of scenario analysis, and it was most likely the best case scenario.

The stock's rise coincided with the recent rally in crude oil prices as well as the KLCI itself. These are supportive of sentiment, so there was a realistic chance that the buying would continue.

THE TRADE : After disposing Hibiscus-CA earlier on Thursday (February 15), I noticed that the buying interest in the mother share didn't cease. In a short burst of illiquidity, the stock hit a peak of 98 sen before retreating. Yet it never retreated to the day's open (92 sen) or the previous day's close (90 sen). The 'gap', as seen above, was a clue that the stock may realistically attempt to break the RM1 mark.

So you have a situation where the conditions are favourable ; a good macro environment (a recovery in both the KLCI and crude oil), good technicals (the 'gap' and sustained buying volume) and a clear grasp of what to expect (the stock will attempt for RM1. Doesn't matter if it stays there; there's enough time to achieve that 6% yield).

I managed to sell the warrants at 8.5 sen to lock in that yield. The KLCI rallied further and Hibiscus broke the RM1 mark. Beyond this you may want to finally incorporate the fundamentals angle (the expected positive earnings by the end of this month), but that would be a different kind of trade.

Note : As of 11AM today, CC actually hit 9.5 sen.


Obviously these are the best-case scenario trades. I have a multitude of losses from short term trades that didn't work out, but the magnitude of losses are much smaller compared to the gains shown in the above examples (I tend to lose far bigger amounts for holding on to trades for too long). On trades that don't work out I try to cap my immediate losses at below RM1k. I'll probably dedicate a future blog post just for the losing trades and the lessons learned (they are much harder to write about, for some reason..).

But given the chance to make a 30% profit, should a trader be willing to lose 5%? Absolutely.

Monday, 12 February 2018


The global turmoil in stocks over the past week has left many scrambling to find a neat, credible explanation. Perhaps it was the US jobs data. It did coincide with the new Fed chairman's first week on the job - fear of more hawkish policies? There were a couple of blowups in volatility linked investment products - was the selloff triggered by algorithms disposing positions indiscriminately?

Or perhaps everybody's missing the point. Here's one thing that nobody bothered to find a neat, credible explanation for - how did volatility remained at record lows for so long? It shouldn't be a surprise, or a concern, that last week marked a return to normalisation. Low volatility points to a dysfunctional market, not a normal one. The real concern is on what happens next.


 Wall Street on Valentine's Day.

Analysts, pension fund CEOs and the financial media have a vested interest to tell you to 'buy the dip' - nobody wants to hear the music stop. Investors are preconditioned with a bullish bias with a healthy dose of arrogance - we are not wired to anticipate or think about crash scenarios.

While I don't claim to know what's going to happen next, what I'd rather do is weigh the possibilities equally : either now's a good time to buy the dip or it's a good time to sell stock (and buy put warrants). But the first part is well covered; look up any financial website or business newspaper and chances are that our pre-existing positive biases are well-satisfied.

What I will not discount is the likelihood of a painful, sustained decline in the stock market. The aforementioned historic low volatility is just one of the weirdness that we have become accustomed to. There are a lot more and they should all be considered warning signs, because we might never get a neat explanation to the recent stock selloff.

Now let's have a look at the global volatility benchmark and what it means for the KLCI (and your portfolio).

How the KLCI Reacted to VIX

I Ctrl+V'd this from Wikipedia : The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange.

Also known as the 'fear gauge', the VIX has a real and discernible impact on global markets. It has been trading at historic lows over the past year (until now), and in the past any sudden spikes tend to be easily explained. But to put the latest one in context let's have a look at this chart:

Weekly chart : 2014 - present.

Important things to note:

1) The first ??? in October 2014 was the last time such a big spike in volatility wasn't so easily explained. There were a lot of ideas floating around (First ebola case in the US, weak US economic data, protests in Hong Kong, the anniversary of Black Monday, etc) but ultimately the sudden decline in the Dow and S&P 500 had no easy explanation. The markets did quickly recover despite crude oil prices beginning its precipitous decline later that year.

2) The yuan devaluation in 2015 was the last time we encountered such a big spike in the VIX. There was a genuine selloff across asset classes and a flight to safe haven assets during this time as the news has real global implications (in terms of economic growth and trade, among others). Gold was the sexy thing to own during this turbulent period - newswires lustily reported about the latest incremental moves in the asset daily, similar to how they're treating bitcoin now.

3) Nobody's calling the current selloff a 'flash crash' yet. But if it is, you'll likely see a return to stability within a span of four to five weeks. The decline cannot just be attributed to the 'inverse vol exchange traded products' that just blew up : the selloff is more broad based.

The February decline was the worst selloff in US stocks in six years. Let's look at another chart - a comparison between the VIX and the S&P 500 since the global financial crisis.

Weekly chart : S&P 500 in blue.

It is partly true that US economic growth contributed to the S&P's ascent to all time highs. But it's equally true that access to cheap liquidity and low bond yields drove capital into the stock market.

And quite plausibly, the presence of historic low volatility lay the foundation for stocks to break new highs. Economic growth reaffirmed investors' confidence, and they continue to buy stocks amid a lack of market turmoil, thus improving confidence further in a self-reinforcing cycle.

"Other investors may have been lulled by the years of relative serenity in the stock markets. The average volatility rate for 2017 was lower than every single trading day from Dec. 22, 1995, to June 20, 2005. The VIX finished below a level of 10 -- super quiet! -- on only nine days before May 2017 and 68 days since." - Bloomberg story

Buying the dip, or shorting volatility, are both strategies that have worked for many years. But how do you know for sure that what happened last week wasn't a historic shift? You don't.

Now for the KLCI. When was the last time you've seen a chart like this?

In charting parlance the isolated candles that you saw throughout last week are known as 'gap downs'. There was no orderly trading or sufficient liquidity in the prices of the KLCI's component stocks. The entire market shifted quickly and severely, such as during one hair-raising period when it fell by 4% in three days.

Daily chart : KLCI year-to-date (up to Feb 9, 2018)

The last time such a gap phenomenon happened was here in 2014, when oil prices began its historic decline. This was also a 4% decline in three days :

Is there a takeaway here? Is it a fair comparison? The truth is, I don't know. But as a reflection of volatility it is clear that the KLCI is taking its cues from the US markets and by extension the VIX itself.

Both periods were part of a global selloff, even though the current one lacks a clear explanation (so far).

Weekly chart : KLCI, December 2014 - January 2015

I was emphasizing the gaps as a measure of volatility. Another comparable period was during the yuan devaluation.

Note that despite the frightening 11% decline in four days, there was more liquidity and what looks like an orderly selloff. The presence of buyers and sellers indicate a less dysfunctional market than what we saw last week.

Therein lies the question : why the panic last week? Why was there a clear loss of liquidity and unwillingness to support the market?

My theory : it seems to have been a repricing of risk and the recognition of added uncertainty. The desire to buy the dip is outweighed by the desire to stay in the sidelines for now. As of last week we are still taking the cue from US markets (which rebounded on Friday) but the extreme decline in Chinese and Hong Kong stocks is not an encouraging sign for market bulls.

Weekly chart : KLCI, July - October 2015

So what are your options

1) Buy the dip now : History is on your side when it comes to declines of 5% in the stock market. You may profit if everything goes back to normal. Malaysia's economic prospects remains positive - at the very least you can always accumulate good value stocks.

2) Reduce market exposure : Sell part of your holdings. Focus on positions that are highly correlated to the broader market - these are the ones that will trouble you the most in times of volatility. Keep some cash in hand to capitalise on buying opportunities.

3) Sell the market, prepare for a decline : Hedge your exposure by buying put warrants :  you can profit from a crash scenario if it happens. There are many actively traded puts in the market right now that are linked to the KLCI, the S&P, the Hang Seng or the China A50. Alternatively you can sell short a few KLCI futures contracts as a hedge. It's just insurance against a market catastrophe.

4) Do nothing : Perhaps this is all just noise. Stay invested for the very long term. You're probably laughing at the panicky herd right now. On a 10-year timeline none of this really matters.

The spike in volatility is worrisome, but time will tell if this will be sustained. Either we're experiencing a brief market hiccup or we're staring at the abyss from the top of the longest bull market in history. How cool is that?

Monday, 5 February 2018


Investment banks love to issue call warrants as much as people love to trade them. It seems like a new one comes out every week.

Let's say you're given a list of call warrants to choose from. How on Earth do you pick one out? We get asked about this often. Honestly it took me years to provide an answer other than "just buy the top volume one lah!".

We will use HENGYUAN as an example.

One dad, 18 children. All asking for your money.

Based on this, if you're stingy with your money (like us), you'd probably gravitate towards the cheaper ones at the bottom - and you'd be partly right. But there are still six that are reasonably priced between 18 sen and 32 sen. So you still need to filter your choices.

We'll explain how we approach this problem, along with a few market quirks that may help you in your trading. Note that we won't go into the technical details, but if you're interested in that, check out Macquarie's warrant website.

You can adjust the profit target and timeline to your own preference. We're using ours for illustrative purposes.


The first step is something that sounds like it came straight out of a self-help book: where do you want to be and how do you want to get there?

In other words, what are your specific targets?

Ours is : a profit of 10-30% per call warrant trade. Any less and it's not worth our time and efforts. Any more and it's an added bonus. The profit target represents the leveraged characteristics of call warrants; it's why you can boost your profits with a lower amount of capital.

Using the 30% target as an example, here's a visualization of what it takes to get there:

Some general observations  :

- The higher the warrant's price, the quicker it moves relative to the mother share (Delta).
- The higher the warrant's price, the more illiquid it becomes (when close to expiration, the issuer has most likely sold off its entire inventory to retailers).
- The closer to maturity a call warrant is, the more illiquid it gets (lack of trading interest, lower market making activity by the issuer).
- If the mother share stagnates, the call warrant will steadily decline (time decay).
- If the call warrant is cheap (like, at 9 sen), don't expect it to move much even if the mother share rises 10% in one day. With a 30% profit target, your target price is at 11.5 sen.

In this scenario, let's rule out CA to CG as they're nearing expiry. As at January 27 2018, CG has 62 days left to expiry, but after discounting weekends it's much closer to 40. We advise to never trade call warrants with 60 days or less towards expiry.

The main reasons : 

1) You're putting yourself in a corner. If the mother share does not move in the next two weeks (already a fifth of the call warrant's remaining tenure), you will lose money. Additionally, you will have trouble getting out if your position is large (100,000 units or more) as the call warrant will become more illiquid.

2) The liquidity factor means that your risk outweighs your reward. If HENGYUAN rallies, of course temporarily there will be improved volumes in the bid-ask spread, and the call warrant's price may move faster. But if the share quickly declines, you'll have a problem with taking profits as the volumes dry up. Everybody's gonna be selling at the same time.

3) You have better warrants to trade : cheaper, newer ones. The price of CA to CG reflects previous big rallies. Your upside potential is clearly limited by now with the old issuances.


Decide on your thematic angle and potential trading periods. There are broadly three main types:
1) Proactive : Are you building up a position to ride the momentum? (two weeks or more)
2) Proactive + Event driven : Same with (1) but you're planning a trade in anticipation of HENGYUAN's next earnings disclosure, for example two weeks or more prior to the event
3) Reactive, speculative : You're putting on a speculative position after noticing that HENGYUAN is up 5% today, or over a few days

The theme helps with determining your timeline. Set very specific deadlines ; if you're not profitable by then, it's not the market's fault. You could've got in at a bad price or you could've missed out on the chance to take profits. It's better to feel stupid with a RM200 loss than RM2,500.


Buying call warrants is similar shopping at the supermarket : there's a trade-off between a the price and how much of it you can buy. Your risk appetite and capacity to trade in size are also important. There are no right or wrong answers; some trade 100 lots, others trade 100,000 lots.

Our personal preference : somewhere around 1000 lots (100,000 call warrants). Less if we don't like the mother share's volatility, more if we're already profitable with the position and I'm keen on adding to it.

Because of this, we tend to buy call warrants that are priced between 17 sen and 30 sen. Anything higher (like, 50 sen) means that we'll only be able to buy half as many warrants with my capital. It takes longer to get to the 30% profit target and with less warrants, so my actual profits may be smaller. Of course, there are exceptions. If we find a call warrant at 32 sen and it has all the right characteristics, we'd get that.

Anything less (10 sen) means that only a truly big move in the mother share can trigger a major move in the call warrant. Another problem : the volume can be too high (everybody wants to buy the cheapest warrant with the most volume). Any move to the upside can be slow and you'll be at the mercy of high-volume traders, syndicates, or the market makers. It's like trading SUMATEC nowadays; it takes 100 million shares traded for the stock to move up 0.5 sen, if it moves up at all.

Too much liquidity is not good : call warrants are not popularity contests.


Using our own preferences, so far we've narrowed it down to five call warrants: CN, CO, CO, CP, CQ, and CR. The next step is very important: monitor the call warrants for a few days. Make an assessment of the trading interest in the call warrants.

There has to be a reasonable level of liquidity and trading interest. Let's compare two types of buy-sell queues (or the bid-ask volume):

(1) Good.

(2) Bad

Liquidity is a function of two things : retail participation and market making. Market making is simply the automated buy and sell volumes provided by the issuer throughout the trading session: they need to give you some liquidity so you'd trade their call warrant. (1) shows a fairly illiquid buy-sell. It can be expected to move up quicker as there's little volume pressure in the sell queue.

On the other hand, (2) demonstrates the perils of too much liquidity. Clearing the sell queue at 0.085 requires the market to buy 50,000 lots - you're essentially at the mercy of other large-scale traders. Expect the same kind of volumes at 0.09, 0.095 and so forth : achieving your upside takes time. Due to the time-sensitive nature of call warrants, this is clearly not good.


This is where it gets a little complicated.

Hengyuan-CN -what?

Here's a less detailed table for comparing the five call warrants:

Data as at January 26, 2018. Hengyuan's stock price : RM13.68.

This link explains the technical terms of call warrants better than we ever could. But from a more practical standpoint, my choice of warrant largely depends on day-to-day liquidity, the bid-ask spread, and volume. 

In short term trading, the main considerations should be on the practical aspects of trading - ease of entry, assurance of liquidity, and so on. The terms are useful if you're comparing call warrants on a long term standpoint, but these call warrants will expire in just under eight months. At Hengyuan's current price, these warrants are hopelessly out-of-the-money anyway, so the information provided above is of limited value in the context of short term trading.

Here's a couple of indicators that can be useful:

Simply put, sensitivity is how much the mother share must move to get a corresponding 'tick' (0.5 sen for warrants below RM1, 1 sen for warrants above RM1) in the price of a call warrant. So in the case of CN, Hengyuan must move by 8 sen for the call warrant to move by 0.5 sen, up or down. Note that at Hengyuan's current price, an 8 sen move is only four ticks (stocks above RM10 move in increments of 2 sen).

CQ and CR's higher sensitivity is a reflection of their cheap price (16.5 sen each) and higher conversion ratios than the other three. This does not make them worse picks than the other three. CN has the lowest ratio out of the five and is also priced at 16.5 sen, but its exercise price (RM24) and effective gearing is far above the other. Again, the trade-off is there (buy cheap in return for higher risk and a ridiculous benchmark in the exercise price).

Don't view the exercise prices as a realistic target for the mother share. Think of it as a reference point for the issuer in pricing the warrants. But if your analysis suggests that Hengyuan's shares can hit RM19 in the next 7-8 months, feel free to hold a very risky, long term leveraged position (this is something I wouldn't do due to the time decay effect and external risks, particularly the volatile crude oil price situation).

The number of shares issued is the other important indicator. It's useful in determining the potential day-to-day liquidity and volume in any given call warrant. Note that a lot of these warrants were very recently issued; you need to observe the call warrant's behaviour over a period of at least a few days to determine whether it meets the liquidity and volume criteria.


Our personal pick out of the five (again, there is no right or wrong here)  is HENGYUAN-CO. It straddles between two extremes. The conversion ratio is not too high (18), the effective gearing is the lowest (1.8 times) and the exercise price is among the lowest of the newly issued warrants. 

Its sensitivity is the best (although there's little difference between CO and CN) and the number of shares issued should mean fairly reasonable liquidity in the medium term. In comparison, there's only 21 million CN warrants out there, so you might face day-to-day liquidity risks once the inventory is fully sold to the market.


1) The call warrant might not be liquid all the time : this is the main liquidity risk that you'll face daily. During a selldown scenario (such as when HENGYUAN shares drop 5%), there may not be any automated market making activities temporarily. You may also see lower automated market making activity (with 500 lots in the bid-ask instead of 1,000, for example). Another major risk is that you may see sellers entering the market at the same time to dispose of their holdings. This is why the number of shares issued is an important measure : too much volume and you'll face a flood of selling.

2) The call warrant does not reflect fair value all the time. Technically, all five warrants are considered worthless except for their inherent time value - essentially the call warrant's potential to achieve moneyness. At some points, the call warrant will accurately be a reflection of HENGYUAN current price : this means that the sensitivity will remain constant. At other times, retail trading interest can cause the call warrant's price to overshoot - good if you're already holding a position. At this point we'd usually sell our holdings, which is the moment we can no longer accurately assess the call warrant's value and price targets.

Comparing HENGYUAN's % gains VS Hengyuan-CD. Note the point of divergence/overshoot in November - essentially the starting point where your gains in the warrant will greatly exceed that of the mother share, even without the leverage factor.

3) Historical volatility affects future price performance of the call warrant. This is separate from the time decay effect. Here's a simple example: Hengyuan-CO experienced extreme volatility on the first day of trading - it went from 3 sen to 29 sen in a day. From this point on it is highly likely that the 30 sen mark will be judged as the 'resistance point'. Naturally occurring profit-taking activity in the market at the 30 sen point could affect the call warrant's ability to fairly reflect the increase in Hengyuan's shares.


It's OK to trade based on top volume activity. It's also OK to choose based on the moneyness, delta, implied volatility, etc. The most important thing is to enter into a trade when the call warrant is fairly valued, set a target, and exit when the target is achieved. 

You can chase the market, but never repeatedly. Set deadlines, or the market will force you out of your position when you're wrong. Call warrants are riskier and volatile, but you can also earn major profits from the same risk and volatility.

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