Deciphering A Put Warrant

The structured put warrant for the underlying Sapurakencana Petroleum, SKPetro-HD jumped 20.0% today from RM0.05 to RM0.06, in tandem with the fall in the underlying price. What will be a theoretical fair range of pricing for SKPetro-HD?

SKPetro-HD was briefly mentioned in an earlier post read more. SKPetro-HD has recently fallen to record low (hovering around RM0.05) due to rebound of its underlying in view of positive developments relating to the planned OPEC production cut:

SKPetro vs SKPetro-HD.png

One possible way of ascertaining the fairness in the valuation of warrants is to assess its current level premium / discount of the warrant. The formula for put warrant is shown below:

{Underlying price – [Strike price – (warrant price x conversion ratio)]} /Underlying price x 100% 

As shown below, the current warrant premium of SKPetro-HD (11.1%) is lower than its historical average warrant premium of 15.2%. In a simplistic sense, this may potentially mean that SKPetro-HD may be undervalued.

Historical Premium Unadjusted - SKPetro HD.png

Nevertheless, all warrants have time decay that will erode their value over time. From a common sense perspective, the premium of a put warrant should decrease over time due to loss in value resulting from time decay. In our SKPetro-HD case, the premium / day to expiry started its decline (since early October 2016), as it approximates its expiry date (in January 2017):

Warrant Premium Per Day To Expiry.png

For the purpose of this desktop analysis, we have estimated a theoretical warrant premium based on an average warrant premium / days to expiry of 0.104% per day to expiry and have compared it to the actual warrant premium:

Est Prem vs Actual Prem.png

As shown above, the actual warrant premium is relatively higher than the theoretical warrant premium, i.e the current warrant price appears to be relatively more expensive.

The table (shown below) highlights the following:

  • As SKPetro-HD nears its expiry date, the expected warrant premium will decline with passage of time. For example, by 15 November 2016, we may potentially a warrant of premium of 7.5%.
  • Assuming warrant premium range of between 6.0% – 10.0% and underlying price of between RM1.40 – RM1.53, we may potentially see a trading range for SKPetro-HD to be between RM0.046 and RM0.085 per warrant.

Summary of possible warrant price.png

Latest technical view on underlying

In view of uncertainty surrounding the OPEC production cut, the underlying appears to be bearish: 

  • Breaking below lower band of Bollinger Band;
  • Never breaks the resistance of 200D-MA
  • Indecision doji to be followed by a large black candle
  • Share price has fallen below 20D-MA and 50D-MA support lines
  • Volume has been generally low
  • Bearish MACD & RSI indicators

interactive_chart_c81e728d9d4c2f636f067f89cc14862c.png

It is important to note that detailed valuation of warrants should be undertaken via Black Schole or other appropriate warrant valuation methods. The above analysis is based strictly on simple mathematical reasoning.

Appendix: Data

Appendix Stats.png

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Author: Ken Utau

Markets Observer + Food Lover

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