Monte Carlo Analysis: FBMKLCI

Out-of-money structured FBMKLCI put warrant (code: 06502L) shall be expiring on 31 July 2017. It has a strike price of 1,625.00 which is significantly below the current index price of FBMKLCI of 1,791.31 (16 June 2017).

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What is the likely chance that this put warrant will be in-the-money upon its expiry?

Continue reading “Monte Carlo Analysis: FBMKLCI”

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?

Continue reading “Deciphering A Put Warrant”

Buying Insurance Against Fallout In The O&G Sector

We have recently seen continuous flow of bad news from the Oil & Gas sector in Singapore:

Further, crude oil may be falling again. http://www.usatoday.com/story/money/markets/2016/08/03/crude-oil-prices-may-back-skids/87454152/

It is time to maintain cautious stance toward the O&G sector and to consider hedging (i.e “buying insurance”) against further possible fallout in the Malaysian O&G sector. One such instrument that may be considered for the purpose of hedging is SKPETRO-HD (5218HD), a structured put warrant on Sapurakencana Petroleum (a Malaysian listed O&G company). Extracted from Malaysia Warrants the following are key features of this structured warrant:

 

MQ Terms.png

Since mid 2015, SKPetro’s share price has been on a downtrend:

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Target analysts’ price for SKPetro ranges from as low as RM1.20 to RM1.90.

SKpetro target.png

A higher volatility of the underlying as well as a lower share price of underlying will increase the share price of the structured put warrant, SKPetro-HD. In a nutshell, one should not consider buying a warrant when volatility is high (i.e should buy before volatility rises).

As shown below, the YTD historical volatility (10D,30D,50D and 100D) have recently trended lower, below that of average historical volatility of approximately 46%.

YTD HisVol.png

From a different angle, the following graph shows the proportion change (YTD) for the historical volatility of SKPetro has fallen below 1.0 (since 1 Jan 2016), thereby showing a lower recent volatility.

YTD HisVol Prop.png

As for the implied volatility of SKPetro-HD, the current implied volatility of 70% approximates the average implied volatility (since the first issuance date of SKPetro-HD) which is approximately 70%.

ImpVol.png

With the implied volatility of SKPetro-HD approximating its historical average and historical volatility of the underlying is relatively lower than its average, this may present potential opportunity to consider this instrument.

Assuming the following parameters:

  1. Implied volatility of 70% (based on average implied volatility)
  2. Underlying share price of RM1.20 (as per the lowest target price by analysts)
  3. Assuming underlying touches RM1.20 as of 30 September 2016

The possible theoretical price range of SKPetro-HD is computed based on the warrant calculator from Malaysia Warrants

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At current ask price of SKPetro-HD of RM0.10 per warrant, we may be able to achieve a 15% return on investment (should the warrant price increase to RM0.115).

Final Words: It is important to note that this is a simple desktop analysis. Further bad news in the O&G sector will drive the volatility of the underlying, which may translate into higher implied volatility for the SKPetro-HD. Nevertheless, based on past trading volume of SKPetro-HD, it has a very low trading volume, thereby questioning the appropriate fair value to be accorded for this instrument.

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