CALL Warrant 101 Part 1

Posted by Kris | Sunday, January 09, 2011 | , | 0 comments »

Picking Up The CALL

This post is for my friends who dabble in stocks and bought warrants based on tips without knowing what the heck a CALL warrant is. Call warrant  or call options/contract is not new to the stock market. It accounts for a vast majority of volume transactions in well developed markets like the US, Hong Kong. Due to the liquidity and volatile markets there, warrants are used as arbitrage and to leverage tool to earn more PROFIT, provided your CALL is correct. (No pun intended). Another analogy is picking UP a CALL, so you expect that when you buy a call warrant, the underlying stock or mother share must GO UP to make a profit!!

A little history in KLCI. Call warrants were introduced/issued by universal brokerage firms at the start of 2005-2006, if i am not mistaken. During the introduction, it was not very hot because the retailers don't really know what it is. BUT its "cheapness" attracts more and more punters as the BULL market progresses. These groups of warrant are not to be confused by warrants issued by companies to fund their capital. These CALL warrants are especially designed to increase market liquidity and make some SERIOUS dough to the CALL writers or issuers.

Ah..i remember the days that subscribing for call warrants where like buying Amanah Saham Malaysia. Got money, still cannot get any. And the prices of the warrants flew like rocket on their 1st day debug.

How To Differentiate Between Call Warrants Issued For Capital Rising by Companies or Underwriters.

Capital Rising call warrants - Usually very long term to expiring - some like 5-10 years!!
Call warrants by issuers - Usually 6-9 months(considered long, if you look at the US markets, call warrants have a lifespan of 1 month!!)

What Does Call Warrant Mean?
A warrant that gives the holder the right to buy the underlying share for an agreed price, on or before a specified date.

In KLCI, we can only be the holder to the rights to buy and not the issuer of a call warrant. Thus, there are no usual strategies such as bull spread, bear spread to play with the warrants.

Hope this give my friend a head up on call warrant mechanism.