Warrant trades climb amid stock sell-off

AS THE stock market takes a hammering over the past two weeks, trading in covered warrants has shot up dramatically.

Investment bank BNP Paribas data shows that warrants comprised nearly one-fifth of the total volume of share trades on the Singapore Exchange this week.

By contrast, covered warrants made up only 14 per cent of all trades between Feb 12 and 16 - the last full week of trading before Chinese New Year and the recent market correction.

There was also a sharp jump in the value of trades, with $445 million in warrants changing hands this week, compared to $406 million from Feb 12 to 16.

Traders are drawn to warrants in the light of the recent panic sell-off in global bourses as they can provide exposure to entire markets.

Warrants are a cheap way to bet on the movement of a single stock, or a wider market, by tracking key benchmarks such as Singapore's Straits Times Index or Hong Kong's Hang Seng Index.

Buying a call warrant gives the holder an option to buy into a stock or index over a period of three to nine months at a pre-set or 'strike' price. This means holders generally want to see a rally.

Put warrants give the holder the option to sell a stock or index at a 'strike' price over a period.

The head of warrants sales at Macquarie Securities, Mr Barney Matthews, said: 'When the market is volatile, traders don't have to choose between individual stocks as they can just ride on the index which gives them exposure to the whole market.'

Mr Simon Yung, head of retail listed products sales at BNP Paribas, observed: 'Turnover in index warrants rose from 39 per cent to 47 per cent of the total daily warrant trades when the market corrected.'

A further breakdown showed that as investors turned bearish, put warrants have also become more popular, accounting for 36 per cent of daily warrants trades now, compared with 20 per cent just three weeks ago.

The Hang Seng was easily the most popular index for both calls and puts, accounting for 25 per cent of all warrants traded over the week.

Given the volatile market, Mr Yung advised traders who plan to 'pick the bottom' if shares go into free fall to only consider using half their usual investment outlay to minimise risk.

Those planning to hold warrants for at least one week should consider warrants whose 'strike' prices are at least 5 per cent higher than current market prices.

Investors should also avoid warrants that are almost fully issued out. This is because foreign banks, which let traders get in and out of warrants easily by giving price quotes, may widen the spread between the bid and offer quotes. Mr Yung said: 'If everyone is trying to sell the warrants at the same time, it would be harder for investors to get out.'

engyeow@sph.com.sg



Mr Yung says turnover in index warrants rose from 39 per cent to 47 per cent of total daily trades when the market corrected.