Warrants Commentary (1 to 5 Oct)
As the trade war between the United States (US) and China continued, Hong Kong’s Hang Seng Index (HSI) was not spared, suffering a 2.4% decline last Tuesday upon reopening following a 3-day weekend. The volatile HSI then continued its plunge, falling an additional 553.81 points over the rest of the week to end the week at 26,572.57, down 4.4% week-on-week (w-o-w). This puts the HSI below the Dow Jones Industrial Average for the first time in 15 years, with the last time taking place when the deadly SARS epidemic caused the Asian markets to crash in 2003.
Recently, HSBC and Standard Chartered downgraded the forecast for Hong Kong’s gross domestic product (GDP) from 3.8% to 3.5% and 3.6%, respectively, citing higher interest rates and fallout from the US-China trade war (SCMP, 4 Oct). Warrants over the HSI traded up a storm, representing close to 80% of last week’s turnover. The top traded warrant was none other than put warrant HSI-H4O, with more than RM71.6mil. traded. As put warrants move in an inverse direction to the underlying, the value of a put warrant increases as the underlying declines. The HSI-H4O rose 30.5% w-o-w to end the week at RM0.535.
On the flip side, warrant prices for call warrants over the HSI continued to slide, tracking the underlying closely. The warrant price for the top traded call warrant HSI-C3Q fell 42.4% to RM0.305. It is important to note that due to the HSI’s sharp decline, a number of call warrants over the HSI have fallen drastically in value and are currently almost worthless, as their exercise levels are a lot higher than the current underlying level, meaning they are very far out-of-the-money call warrants.
Another key aspect when trading warrants is to look at the inventory remaining for that warrant. As at Friday, call warrants HSI-C3N, HSI-C3R and HSI-C3S were fully sold out, which means the issuer is unable to provide an offer price for these warrants for as long as they remain sold out. When this happens, there is a possibility that these warrants may be trading higher than the issuer’s fair price. You can check whether a warrant is sold out with the warrant search or live matrix tool.
Top 5 warrants by traded value:
|Issuer||Exercise level||Expiry date|
|HSI-H4O||71.6||Macquarie||25,400||30 Jan 2019|
|HSI-H4I||58.4||Macquarie||27,800||30 Oct 2018|
|HSI-C3Q||51.5||Macquarie||29,200||30 Jan 2019|
|HSI-C3P||23.6||Macquarie||30,200||30 Jan 2019|
|HSI-C3T||18.9||Macquarie||29,000||27 Feb 2019|
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Provided for Malaysian residents information only. It is not an offer or recommendation to trade and is not research material. Past performance is not indicative of future performance. You should make your own assessment and seek professional advice.