Sunday, 18 August 2019


Imagine that you live on a small island. As a chicken farmer,  you work at the island's only marketplace. Poultry farming has not been industrialised yet - no Leong Hups or Teo Sengs around here.
This market is abuzz with activity as this island relies on a steady supply of goods delivered from the mainland. These include fruits, bread, motor oil, bicycle tires, etc. There's not much to grow locally; your island's GDP is undoubtedly very lousy. Like Singapore's.

One day the perfect storm hits. Your house is inundated with flood waters. Your pets and chickens have drifted away. The situation is pretty dire : your village chief orders everyone to evacuate the island.

The market ran out of supplies weeks ago; there are definitely no more Amazon gift cards to buy. However, a few daring entrepreneurs from a nearby island saw an opportunity to profit. You arrived at the market to see them selling all these bright, inflatable life boats.

 Your local basketball team  made it out first. Source.

Within a day, your blissful community shows its capitalistic tendencies. Punches were thrown as people scramble to buy these lifeboats. The waters are not receding. 

Somebody suggested an auction system to allow the boats to go to the highest bidder. Suddenly a vibrant market for lifeboats emerged, full of different models and makes quoted at different price points. You ended up trading a whole inventory of different boats on credit; settlement within T+2 days.

In reaction to the rising floodwaters and market demand, these lifeboats' daily price chart looks like this:

 We shall sell ships when the shit hits.

This went on until the storm blows over, at which point boat prices collapsed. With no chickens and a fleet of boats, you end up doing the only thing you can do in this situation: start a boat ride-sharing app.
By now you may be asking: what the hell are we on about?

The previously peaceful island is the stock market during stable times.

The products sold at the marketplace are different stocks of public listed companies.

The storm and floodwaters are the occasional market shaking volatility. 

The lifeboats are index linked warrants; the only 'hot item' to trade during stormy times.

And you, the chicken farmer? You're the trader.


We do not claim to be the authority of index warrants trading, but we have gone through a lot of trades in different market conditions. We have tried to catch the waves and catch falling knives. We have even outlined our strategy for modest but hardly earth-shaking gains.

We regularly trade index warrants linked to the Hang Seng Index. In more vibrant times (Najib times), we had a lot of interest in FBM KLCI warrants too. Those days are over.

Here's a one-sentence crash course on these warrants: call warrants go up when the index goes up. Put warrants go up when the index goes down. If you can anticipate what the index is going to do next, or at least react to what it has been doing, you will be rich.

So why bother trading index warrants? The short answers are:

1) Put warrants are the best way to profit from your bearish market views.

2) During volatile markets (negative times mostly), weak action in Bursa Malaysia stocks mean that trading interest gravitate towards call and put warrants. Bursa Malaysia offers a lot of these, and they have created quite a buzz. There is not much else to trade anyway; so everyone goes to where the action is.

2) They move up and down fast. Assuming you can manage downside risk properly, one-day yields of 10-15% are possible. Let's also assume that 90% of us probably cannot manage downside risk properly.

3) In periods of extreme fear or greed, index warrants may end up cheaper than they should be. Sentiment tends to overshoot real valuation. You can definitely make money by buying the warrants during this time. When sentiment returns (and so do prices), you can be rich.


Here's a sample of our successful index warrant trades. We chose to include two Hang Seng warrants (one call, one put) and two KLCI warrants (same).

These show that we have somehow managed to make money in good times and bad times for the two indices. We may well be talking cock, but we are doing so with some degree of authority on the subject matter. 

This post is not about strategy, skills required to trade index warrants, or trading parameters. We have covered those elsewhere on this blog in detail. Instead, we'd like to talk about what it takes, and what it will cost you.

You will either get excited or get disgusted about index warrants by the end. We are sort of inadvertently trying to show you if you should trade index warrants at all.

Again : how hard can it be? 


Let's put aside the very real and very significant risk of severe financial losses for a moment. That's the most obvious 'con'. You know this.

For us, the real impact caused by trading index warrants - particularly those of the Hang Seng variety - are the mental and emotional tolls. 

Because the cyclical nature of Asia markets and how they impact US markets, and vice versa, you will not be able to switch off, daytime and nighttime. This becomes especially bad when you intend to hold certain positions overnight or over several days to let the market move in your expected (profitable) direction.

While we have advocated that you should not hold overnight positions in index warrants, in certain situations we would make an exception. This is because from time to time, markets can get so out of whack that they present extraordinary opportunities for profits. We are talking yields of 15-20% within one or two weeks.

And in this current market climate, that exception holds. We still dabble with the occasional one-day volatility plays, but we have been eyeing much bigger game. 

So usually trades like the one below are OK. We have documented a whole bunch of these.

But the overnight trades are unlike these at all; they are different beasts altogether. It's the equivalent of having to stick your head into a crocodile's mouth to reach the treasure inside. You will not have an enjoyable time.

But still, the rewards are real, and they can be extraordinary. You can make RM15,000 profits in two days; these are magnitudes beyond the intraday opportunities we describe above.

However, trading them comes at a cost, which we will count here one by one.


When you have a big index warrant position that you so bravely (recklessly?) determined to take overnight, you will be consumed with anxiety. 

For example, say that a super trader (you) has managed to accumulate 500,000 Hang Seng put warrants at 20 sen apiece. In this scenario, a half sen move is a RM2,500 profit. (Editor's Note : this is not us. We are neither super nor have the gumption to put on such a position. However, the following description of the trader's mental state mirrors some of our own past experiences).

Put warrants reflect the trader's belief that Hong Kong's markets - and by extension the US - still have further down to go. The HSI is already down by 10% in August 2019 alone, making it a fall of historic proportions

Imagine yourself doing the following over the course of ten days.

Since Hang Seng's actual index prices are quoted until 4PM, beyond that you will need to look for other clues. 

So, from 4PM onwards, you would look at Hang Seng's futures prices. Every up and down move relative to the Index closing price would be scrutinised.

Then, at nighttime, you'll wait for US markets to open. Does it reflect HK markets earlier, or will it take the lead, thus influencing tomorrow's HK prices? There are only guesses; nobody really knows. 

People may try to deny it, but these days the profitability of our investment portfolio tends to be influenced by a most bizarre market catalyst : Donald J. Trump's big fat mouth. There's even a page dedicated to this: please bookmark it, it's awesome.

 Faces and things that will keep you up at night. Source.

Throughout the night, you will likely end up refreshing your tab to see what the S&P500 Index is priced at currently. Did it react strongly or indifferently to Trump? Did it move due to broader negative sentiment, driven by unrelated events such as the Hong Kong protests or the Argentina stock market collapse? Or does the S&P500 have a life of its own?

Papa Trump can also be your saviour, of course. So you end up hoping for him to say something that will turn the market around. A half assed concession to Chinese trade demand, perhaps. Or a snap decision to save Christmas on behalf of Americans, maybe. Or maybe he will stick to what he does best (worst); a raging tweetstorm at the Federal Reserve, demanding that they save the stock market via further rate cuts (hey, Trump can't do it all alone you know...).

 *shrug emoji*

When you wake up the next morning, you will try to catch up with the night's developments. And since the Hang Seng market only opens at 9:30AM, from 7:00AM onwards you would end up looking at HSI futures prices... 

You have a big position to take care of. Maybe your paper profits are burning through a hole in your imaginary wallet. Maybe you just swallowed a RM10,000 paper loss, and need to swallow another RM10,000 more... and then the markets open.

The combined effect of all this is sensory overload. Your index warrant position rules your life, and you can suffer mentally because of it. You will likely lose sleep over it. You become hopeful and fearful at the same time, all the time. You will wish for a simpler life, perhaps as a chicken farmer.

But here is the worst part : when it comes to trading index warrants, even if conditions mean your position should gain tomorrow, you will be still be anxious. What if S&P500 gains 2% but HSI doesn't the next day? What if your position's value deteriorates despite everything else going in your favour? There will be an endless supply of concerns and worries. No sleep.

This is the ultimate price.


The cause of all these anxieties is very simple: it's what happens when you lose control, but are unwilling to accept it.

The admission that all these factors are beyond your control creates a sense of helplessness. You have a position, sure. You may have been very smart, or lucky, to have gone into the trade at the right time (doesn't matter which). You may also be riding what is a very profitable position.

What you had control over was just the trade. When you take it overnight, everything is beyond your hands. You can create all sorts of trading strategies and try to mitigate losses, but all these can be wiped out by a sudden move in prices.

Forget the philosophical ramifications about pain and suffering. What it really boils down to is this:

Would you go through all this for a chance to make extraordinary profits?

Even for us, we're not sure. We have gone through these phases before, but in small doses. Our profits and losses have not been life changing, but they are enough (the profits, we mean) to keep us going,

But we would never sacrifice a good night's sleep for the sake of profits. Neither should you. 

So don't worry too much about things like HSI futures quotes or Trump. Markets will do what they want to do. High risk means high rewards, but if you let a trade consume your life, it's already a lousy trade to begin with.

How hard is it to trade index warrants? Pretty hard, we'd say.

Are the profits worth the trouble? Yes they are, and as a learning lesson, these trades are fantastic. They will truly let you see the markets and understand how they actually work.

But beware the costs.

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