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Monday, September 10, 2007

Investment Competitions, PBBANK-CB & CC

By now, some of you are aware of Bursa Malaysia's investment competition here - http://www.bursapursuit.com/ It seems, this was discussed in not just this chatbox, but in more than one cbox around the Internet.

Personally, I am not a fan of investment competitions because they do not involve your own real money. One could take the craziest level of risk (e.g. 100%+ asset allocation, no diversification, just invest in 1 warrant with highest level of gearing, etc.) in order to generate chances for obtaining super-normal returns, which one would not normally consider doing in real life.

However, since a few of you are interested in investment competitions, I thought I'd share with you my own observations about the 2 Call Warrants for PBBANK above. Under certain conditions, I think such type of CWs may generate the chances to generate super-normal returns, albeit with large amount of risk :-)

However, before you read on, I assume you are already experienced and familiar with Call Warrants and how they work. If not, I strongly urge you to skip this article, and stay far, far away from trying to punt these sorts of Call Warrants! Losing 100% of your capital is not an impossible event. Buffett and Graham I believe will most likely stay clear from these instruments.

Firstly, looking at the mother share first, PBBANK closed $9.50 this evening (price chart below).

Both call warrants (CB and CC) closed at identical prices of 5.5 sen today. Both are also nearing expiry. Whilst technically not much use to you for Bursa Pursuit, the same principles or situations might be useful later. I should also mention that some of the faster running HK CW could be a better bet, albeit with risks also and requires good timing to obtain super-normal returns.

PBBANK-CB Condensed Fact Sheet

  • Issued by OSK
  • Exercise Price = $8.85
  • Exercise Ratio = 10 for 1
  • Expiry Date = Wed, 3 Oct 2007
  • Closing Price at Expiry Formula = Arithmatic Mean of Last 5 trading days Closing Prices before 3 Oct 2007. (i.e. 26, 27, 28 Sep, 1, 2 Oct)

Typical calculation

  • "Simple" Intrinsic Value (SIV) based on mother at $9.50 = (9.50 - 8.85) / 10 = 65 sen / 10 = 6.5 sen.
  • Last price traded = 5.5 sen.
  • Typical "Potential gain" calculation = 6.5 / 5.5 - 1 = 18% in 3 weeks time.

PBBANK-CC Condensed Fact Sheet

  • Issued by CIMB
  • Exercise Price = $8.90
  • Exercise Ratio = 10 for 1
  • Expiry Date = Tue, 2 Oct 2007
  • Closing Price at Expiry Formula = 5 day Volume Weighted Average Market Price before 2 Oct 2007. (i.e. 25, 26, 27, 28 Sep, 1 Oct)

Typical Calculation

  • SIV based on mother at $9.50 = (9.50 - 8.9) / 10 = 60 sen / 10 = 6 sen.
  • Last price traded = 5.5 sen.
  • Typical "Potential gain" calculation = 6 / 5.5 - 1 = 9% in 3 weeks time.

Now, the reason I am highlighting these "Typical Calculations" is because I've seen these sorts of calculations before, I've even performed them before, and to highlight that these sorts of calculations alone is INCOMPLETE and POTENTIALLY DANGEROUS.

Why? Because they are simply based on a single scenario, which assumes that the closing mother price (based on either 5 day arithmatic mean, or 5 day VWAMP as the case maybe) remains a constant $9.50 at expiry. They simply ignore the fact of investing, that the closing price is more likely to end up being a different number than $9.50, and the final number could vary hugely from $9.50 under certain conditions.

In other words, it doesn't tell you the potential RANGE of losses or gains if PBBANK closed lower than $9.50. For example, for PBBANK-CB, AT ONE END, if the closing price is below the exercise $8.85, you could lose 100% of your Capital! AT THE OTHER END, if the closing price is $9.95, then, you could double your capital since the SIV then becomes (9.95 - 8.85) / 10 = 11 sen, which is double 5.5 sen purchase price!

So that you understand the range of potential results - here is a typical table that I prepare for my own consideration:

So, what does this mean?

Well, a few key points:

1. The CB and the CC warrant whilst different, is almost nearly identical in features, Intrinsic Value and potential gains if both are bought at the same price of 5.5 sen. (And personally, it doesn't make sense to me as to why one would prefer to own the CC warrant at 5.5 sen, when, the CB warrant at 5.5 sen is cheaper. The differences in returns is nearly 9%!)

2. More importantly, both CW have less than a month to expiry - in fact, they will cease trading in approximately 3 weeks time, or say 15 trading days time. Since prices in the short term (say over the next 3-4 weeks) are rather unpredictable, the operator who purchases these warrants are in effect "gambling", since the outcome of the closing prices near expiry date could be similar to "throwing a dice" - it's pretty hard to predict.

3. A small change in mother closing prices gives a large change in potential gains. Just one tick down by mother share, and your potential returns is 9% lower! On the other hand, just one tick up, and your potential returns is also 9% higher! Not for the faint-hearted, or those with poor or less developed risk tolerance.

4. In an unexpected scenario, it is very possible that you could lose 100% of your entire capital! E.g. PBBANK-CC has an expiry date of 2 Oct. If for some unexpected reason that say on the last 5 days before 2 Oct, US market has a large correction / a market crash, funds could decide to dump PBBANK mother share, and mother share could temporarily closed below $8.90 for a few days, with high volume. This is a terrible event, even if mother price were to recover after 2 Oct. Why? Because the calculation of the CC closing price would be done on 2 Oct, and it would be weighted by volume. So, the final closing price calculated could be below $8.90 at 2 Oct. In other words, you could lose your entire capital at expiry, even though you have paper gain 9% today, and mother share recovered and stayed at $9.50 level after 2 Oct! The timing is critical.

5. Those are some of the bad things that could occur. However, for investment competitions where 100% loss of capital is rather meaningless (since it's not real money), you might want to consider punting in situations like PBBANK-CB since there is a chance that your potential gains could rise to 100%, if mother share rise to $9.95 say.


The above are just merely my own observations on investment competitions and call warrants. There are other tricks to generate chances to win investment competitions, but the right selection of call warrants should give you that edge over others. However, in real life, call Warrants like PBBANK-CB and CC are potentially very dangerous and risky instruments, despite the potential gains since 100% loss of capital is not entirely impossible. In real life, only punt with these provided you know what you're doing, and you can easily afford a 100% loss of capital. If not, then, better to stay away from them, and preserve your capital for a safer, less stressed investment.

For those of you planning on investment competitions, good luck and have fun!