Tuesday, February 06, 2007

New strategy for warrants

I am trying out a new strategy for warrants.

I bought call warrants on HSI last friday and basically just forget that it was there. This approach was quite different from previous trades on warrants because I was typically glued to the screen and had to keep on refreshing. This is because firstly I bought rather big volumes, secondly I was trying to do intraday trades. Even a one bid difference with high volumes will make me break even already.

I thought this was rather risky because my technicals isn't there fantastic..yet. I won quite a lot during dec simply because it was the end of year rally. I bought lots of calls and that's what made me recoup all my losses for 2006, plus interest. During jan, I lost a lot because I was constantly playing against the trend. When the trend was down I played call and vice versa, so it was not a surprise that I lost quite a lot in jan itself.

My new strategy is to trade fewer times, trade lesser volume and to go with the trend and for medium term. This means that once I identified the buy signals based on stochastics, macd, rsi and moving averages, I will buy the warrant with the furthest expiry date and stick to it till the trend changes. I think this will make the volatility of warrants rather 'stable', as long as I cut loss if I made a wrong move and as long as I exit when trend changes had been confirmed. I hope this strategy can help me break out of my current 9 k losses.

I bought call warrants for hsi at 0.365, 5 lots and now it's 0.415, so that's already a good 10% returns. Let's not be greedy and put 20 lots (even 40 lots) like I do last time round. Let's just survive the market first. Once I make consistent profit (that means my strategy is working), I'll raise the volume to increase my profits.

So far, I'm very bullish about hsi. Especially after today where it broke 20,600 mark convincingly to close at 20,655. Everything points towards an uptrend now (though limited one). The next resistance to meet is 20,800. If it breaks that, then we'll have a new high. I shall check out hsi carefully once that 20,800 is near to see if there's signs of reversals. I calculated that since my warrant has an effective gearing ratio of 17.21 (which means that the warrant will change by 17.1% per % change of HSI), if HSI really reaches 20,800, the price of my warrant will be 0.465. This is close to 25% returns.

These calculations are all very interesting because this is the first time I'm calculating the level to reach so that I know what is the price to exit. Let's try it on my sti puts.

I bought at 0.06 with the effective gearing at 24.22 now. So for every percentage change in STI (drop), my warrants will increase its price by 24.22%.
Now the warrant is at 0.025. If STI falls to

3200: Warrant price becomes 0.030
3100: Warrant price becomes 0.050
3000: Warrant price becomes 0.065 (break even)
2900: Warrant price becomes 0.085

And I have up to 29th March for it to drop 200 points before I can break even. 200 points will be around 6% drop within a period of 2 months. Can it happen? Honestly, I don't think so. So what next? I think i'll have to average down my buy price by buying more at a lower price. A good target to average down to will be between 0.045 to 0.050, both points inclusive.

This means that I will have to buy another 10 lots at 0.020 or 0.015 (preferably 0.015), that will bring my average buy price at 0.045 to 0.04667. 10 lots at 0.020 is not a lot of money (it's only $200 excluding commissions) to average down.

What's the risk? STI could have gone up and up till end of march, never correcting to 3100 even after budget day and new year. I will have screwed up big time. Again, the chances of that is slim, I believe. So here's my plan: I will look really carefully next week before/during/after budget day for the CNY rally. Buy 10 lots of puts to average down, and hope for the best that STI will correct to 3100. I'll read the charts later this week to see if it's possible and decide from there.

Okay, enought brain work for now.

Longcheer went down a bit to 1.17. Please please don't let it reverse. 2 more days to release of results, let it rock. Oh, yellow pages posted results, not too bad, still have profits higher than last quarter. They expect next quarter results to be worse than last year, with 2007 earnings to be lower than 2006. This is due to capital investment for their internet yellow pages, which is doing rather well. 100% profit distributed as dividend, as usual. Yellow pages close higher at 1.29 today.


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