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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!


jasonred79 said...

Seng seng seng. You've got the right idea, but in this investment game, only the top 3 winners get anything in each category.
In other words, you need to be even MORE extreme.
I would say that the winning strategy here is to maximise borrowings (Hopefully the game system allows you to borrow up to 100% of your starting capital) and use it to buy bursa warrant (CIMB,Sep 2007).

It's gearing works out to around 50 times! Well... I don't know what terminology Edge or whatever uses, but for me, I mean that if Bursa goes up 10%, the warrant increases in value 50x10=500%.

Of course, this sort of leverage means you've got a VERY good chance of losing 200%... meaning that if you started with +250k, you'll actually end up in debt of 250k. So, I wouldn't recommend anyone to follow this strategy in real life!

Seng said...


My objective is to simply plant a seed, not to provide a complete roadmap.

Anyway, as long as you remember there is a difference between investment competition and real life investing, and never confuse between the two, then, you should be alright.


Seng said...


I just have a look at Bursa-CC that you suggested above.

I would advise strongly against that.

Bursa-CC will be suspended from trading tomorrow, on 12 Sep 9 AM.

The Closing Price will be calculated using 5 day VWAMP starting from 7 Sep to 13 Sep inclusive. On 7 Sep, the closing price was $10, on 10 Sep, the closing price was $9.8, and volume about similar in both days - this suggest the VWAMP so far is close to $9.9, i.e. the Intrinsic Value is worth zero if those were the expiry prices. Your chances of coming out of this deal with your capital intact is now looking less than 50/50 ...

Furthermore, at the time of writing (lunch time), Bursa closed $9.8 - again, below break-even at $9.95, if you get in at 0.5 sen. Even if today closed 9.85 or 9.9, you could still lose money.

In short, the odds are now looking to be less than 50/50, that you'll preserve capital.

Even if it is an investment competition, I wouldn't take such a risk, as the odds are not 50/50, the potential gains smaller ($10 VWAMP is less likely, and even then, only double capital at 0.5 sen) ... and in real life, even if one can afford to lose 100% of capital, I still wouldn't bet because the odds are not 50/50.

If I compare Bursa-CC with PBBANK-CB, I still much prefer the latter at 5.5 sen, although this is NOT an endorsement to punt PBBANK-CB.

dummy said...

PBBank CB .. Can we exercise PBBank CB immediately to reduce risk instead of exercising it in 3 weeks' time after buying it and to make a profit of 1 sen or 18% since it can be exercised American style /anytime ?

Seng said...

Hi "dummy",

Yes and No. Yes, in that the American Option allows you to exercise the option before expiry. This is why I preferred an American Option to a European Option, because of this feature which allows you to choose when to unlock its value.

However, in terms of "reducing risk", exercising it in practice actually entails more risk because of the procedure. E.g. under HLEbroking, I am required to instruct HLEbroking by 3-4 PM the PRIOR day, for the exercise to occur using closing prices the NEXT day.

So, you immediately have 2 risks:
1. The risk that the daily fluctuations can be greater than 1.5 to 2 sen the NEXT day.
2. That if there is large request to exercise on a particular day, then, what is there to stop the issuer from "dumping" the mother share, in order to artificially depress it at 4.59 PM the NEXT day?

Thus, whilst I would not hesitate to play PBBANK-CB in an Investment Competition, I would NEVER consider actually putting 100% of my capital in it.

It's a very good question, suggest you change your name to something else as the quality of your question does not match your name :-).



Seng said...


This is to update the status of Bursa-CC which you suggested on Sep 11 above.

As I had expected, the last 5 day VWAMP for Bursa has turned out to be lower than the Exercise Price of $9.90. This means that if one had invested in Bursa-CC, one would have lost 100% of one's hypothetical capital in the investment competition.

Your idea, to choose high gearing stock is correct, but the problem I think is 2-fold:

1. You did not focus enough on the trend of the mother share over the next 2 days, nor the advance data you had as it is going to be suspended at 5 PM on Sep 11, the day you recommended. A TA practitioner looking at the mother share would see that the mother is on a short-term downtrend. The odds are less than 50/50 that the 5 day VWAMP is going to exceed 9.9. The potential payoff on upside is also unlikely to be 100%, yet, the potential loss is 100%. In other words, you have a situation where both the odds, and the potential payoff are against the bet. Hence, it would have been a relatively poor short-term calculated risk.

2. I think you also overlooked the fact that PBBANK-CB can be exercised before expiry. One can increase turnover, by "hopping on" from one stock that is stalling, to another stock that has just started its uprise. This maximizes further the potential gains. Of course, if one is not a TA practitioner, then, it would be difficult to identify such a situation.

Today, PBBANK closed at 9.60. Had one exercised it this evening, OSK would pay 7.5 sen (= 9.6 - 8.85). In short, the profit would have been 7.5 / 5.5 - 1 = 36% over 3 days.

With the monies, you can then look for your next stock deal with better upside potential. But there is a potential downside to this also, in that we don't know exactly how the Investment Competition rules works, in terms of exercising American style options. Nevertheless, if you intend to join the competition (I'm not), you may get an edge by enquiring how exactly how this works for competition purposes.

As I advised "dummy" above, this warrant is potentially very HIGH RISK (but potentially HIGH RETURN too). My strong recommendation is to AVOID playing such warrant in REAL LIFE, unless you are truly prepared to lose 100% of your capital.


Thye Yik said...

One could only wish that the term sheet was written better, especially for people who are new to cash-settled warrants like yours truly. The formula in osk sheet left me grappling with my belief that my calculation was correct, and the 36% over 3 days (in fact it could have been higher) calculation was too good to be true. Nonetheless, a quick check with the cash settlement formula in cimb's made it very clear to me that these returns are indeed very possible. Thank you Seng gege, for highlighting this. This certainly added a new exciting twist to my trading strategy, as I have always avoided calls/puts with less than 45 days to expiry..

One thing that still bugs me though. I don't understand why the exercise incidence is at such low figure at 1% as at 7 Sept, when there were some similar situations when it would have made more sense to exercise..

Seng said...

Dear thye yik,

Thanks for sharing your comments.

It is worth mentioning that according to Bursa website, during 24 Aug - 6 Sep, only 50,000 out of 79M warrants outstanding was exercised, i.e. less than 0.1% (not 1%) was exercised.

If you find yourself attracted to the idea of trading warrants for REAL LIFE (as opposed to investment competitions), do be cautioned, and be prepared for the possibility of 100% loss of capital. This happens more often than one might think. A quick look at many of the call warrants out there that expired say this month showed that this indeed does happen (e.g. Bursa-CC). As such, NEVER trade warrants with monies you can't afford to lose. In fact, don't touch it if you don't have an edge - after all, why lose good money in some venture where one does not have an edge? As a rough yardstick, my advice is to AVOID them, if you haven't consistently beaten the index (e.g. KLCI) by using just stocks.

On the other hand, if you have consistently beaten the index, then, please ignore my cautionary comments, as you probably already know this possibility inside-out.