Comments on Warrants

Roden said...
Hi, a friend just recommend your blog to me, I think you are good and would like to learn something from you, especially you are qualify accountant

Dun know much about warrant, as I check Jiutian premium is 65%, isn't too high? Exercise price $0.80. I am novice in stock and warrant market. Can you teach me how to interprete the gearing? how do we choose warrant? base on gearing or premium. If this need to take you a lot of time to explain, kindly tell me any website I could learn about it. Thanks!

Hi Roden,
Thank you for following my blog and ur compliments but I am just doing what many of u can also do. The difference is u need to spend plenty of time "doing ur homework".

I tin u hv done well by pointing out the high premium that Jiutian warrant is commanding at the moment. The text books can teach u all u need to know about Black Scholes and option pricing model. In practice, it is quite different.

Technically speaking, high premium means the market prices the warrant to reflect potential capital gain from converting the warrants. In this case, the market feels that the mother share price will hit higher than S$0.80 in 3 years time and so investors are willing to pay for the premium. The same can be said about PE ratios.

Just like buying a stock, there is no one right formula as to how to choose a warrant. It depends on the underlying stock itself and the time to expiry plus conversion ratios. For me, I bought the warrants with the longest expiry period possible and also with reasonable absolute value. I will never buy warrants eg Cosco at more than $1 as the risk exposure is deemed too much for me.

In Jiutian's case, it is safer because you are buying the warrants directly from the Company and not thru some third party bankers. The chances of it being manipulated is lower.

You may want to read my comments in CNA forum on the expected warrant price before the warrant started trading.

Lastly, remember that all warrants carry high risks. It should only be used for the purpose of leveraging on your investment cost and not for punting. The put warrants provide a hedging mechanism for people to cap their exposure to downside risk. If use wisely, it can supplement your investment portfolio.