Sunday, 1 September 2019


"Shit, online trading not working bro..." Source.
Gross Profits : RM3,000
Return on Investment (ROI) : 11.76%
Duration : 20 minutes

Papa Trump is taking us on a wild ride. Zigs become zags. Clarifications can become clarifications of clarifications. Making lemonade out of lemons is useless now - there's a good chance Trump will piss in it.

50 years from now, our children and their offspring will read this blog post and recall a time when the market seemed to have collectively lost their damned minds. If we are our own worst enemies, Trump is the instigator and propagator of our worst instincts.

His words move markets. He makes us fearful and greedy when it suits him.

Today's trade is about anticipating the extent of such market fears, and how you can capitalise on it to make profits. We made a solid call on market movement (Trump inflicted, of course) and the position delivered. We have been using Trump to make money for a while - he is arguably putting our kids through college.

Anyway! This was a put warrant trade on the Hang Seng index; for the mechanics of put warrants, you can check out our earlier guide.

We managed to profit by using HSI-H6P, a long favoured put warrant that we have previously profited from. The reason for liking it is simple: cheap but not too cheap (it's in the range of 20-30 sen) and fairly liquid. Most other put warrants are either far too cheap (near expiry), far too expensive (and illiquid; we don't like those), or both.

This trade occurred on a Monday : 26 August 2019. We were giddy - with fear - the previous Friday due to a few interesting new developments in the world.

Let's do a bit of news analysis, for a change. Then you will know why this trade is quite straightforward, and more importantly, why the same principles can be applied in future trades.


What was supposed to be a serene week for the markets turned upside down on Friday (23 August) as China made a surgical strike to cut through the B.S. US rhetoric on the trade war. It announced a tariff on US$75 billion of items come September 1, in retaliation to Trump's own imposition of China tariffs.

But China's latest move, which specifically targets US agricultural exports, cuts through a key constituent of Trump supporters. US farmers - who had hoped for better selling prices and are predominantly Republican - stood to hurt the most by China's threat. The reaction in the commodities market was swift, from cotton to soybean. The tariffs simply makes commodity exports to China uncompetitive - and expensive. It's hard to mess with the world's largest consumer of such items.

And what does Trump do? He obfuscates. He claims to certain things happening, knowing full well that the Chinese can't exactly counter every dumb thing he says.

Trump also plays the markets like a fiddle. That's us; we are clearly not more enlightened than this orange blob with yellow haired sprouts on top.

So the market whipsaws, ruining even the most shrewd (?) of index warrant strategies. On 23 August, the S&P500 fell by 2.6%. It was going to be a painful Monday.

We have analysed market fear in length before. Usually the trick is to be contrarian, or go on the offense when everyone is selling. But Hong Kong markets, as always, can be unique. Not only does it bear the brunt of negative moves in China and the global markets, the impact from ongoing protests is a double whammy.

Indeed, since the protests began, Hong Kong has statistically performed worse than China markets, even though their fortunes tend to be intertwined - by this we mean the movement of the Hang Seng Index compared to the Shanghai Composite.

With this divergence in mind, we set about analysing how the Hang Seng will be influenced by US markets' movement on that Friday.


Rule of thumb : US markets hit hard on Friday? Expect a Monday Massacre.

In essence, since the S&P 500 fell by 2.6%, we expect the Hang Seng to at least fall as much. Then think of the protests; we'd add a bit more losses on top of that.

This may sound like retroactive justification for what eventually happened, but our minds were pre-conditioned to deal with just such an event. This is important to maintain focus during trading hours : especially when the entire world is running for the exits.

On Monday, we knew that Hang Seng futures were pricing in a market fall of at least 2.5%. The actual index only opens for trading at 9:30AM (Malaysia time), but Bursa Malaysia opens at 9:00AM.

That 30-minute period basically allows us to buy index warrants based on the movement of Hang Seng futures. You might know how futures move - either in line, too bullish, or too bearish, compared to the actual index price.

You might be thinking, "2.5% down sounds like a lot right? Can't do contrarian with this one and bet on recovery ah?"

This is where a different skill set is required. Analysing market fear does not mean being contrarian all the time. At opportunistic moments, you can also ride the wave.

This is the skill that enabled us to make so much profits in so little time. Our strength is that we can make up our minds real quickly before pulling the trigger. But we might need to swallow some temporary pain.

This is what happened with HSI-H6P. We bought in at 25.5 sen, essentially the 'gap open' price at 9:00AM. It was a ballsy move; the warrant closed at 17 sen the previous Friday. Big gap.

Futures can be volatile things. Hence, after pricing in the market at a decline of 2.5% earlier, suddenly futures prices reversed course. We immediately faced paper losses as HSI-H6P dropped in price. We were convinced that this was a temporary 'false move'. The warrant fell to 23 sen 9:15AM. It was a fairly sweaty 10-minute period.

True to our expectation, put warrant prices rebounded. The market was indeed heading down. And what happens when the market realises the earlier upward move was false? Panic ensues; we figured prices will move in our direction in a big way.

Remember that all these moves are essentially one thing: the market pricing in the opening price of the Hang Seng Index at 9:30AM. When the market did open, it was actually down by 3%; a massive one-day move in any markets anywhere globally. In fact, the the Hang Seng's reaction even underperformed that of US and China markets.

The five-minute charts looked like this. Notice that we swallowed the temporary loss before prices moved back in our favour.

We eventually exited at 28.5 sen, or as soon as our 10% yield target was met. There was no reason to stay in, other than due to greed. We don't do that. 

It's worth noting that the HSI-H6P peaked at 29.5 sen on this day; the put warrant basically went to hell thereafter, and closed the day at 20.5 sen (!!) thanks to another bit of Trumpian theatre.

As always, in the very risky world of index warrants trading:

1) You need to have a well-defined view of the market and a set of expectations. Then your trading actions are dictated by those expectations.

2) You need gumption to execute such trades and but also to withstand temporary losses.

3) Whether in profit or in loss, exit the market on your own terms, always. Don't get greedy.

More Tales By The Pelham Blue Fund