It Is All About The Edge

Little Rocketman has certainly created much anxiety in the financial markets. Further, the planned reversal of QE is envisaged to have greater impacts on emerging markets. Foreign funds have continued (?) to sell their positions on the Malaysia’s stock exchange. The FBMKLCI has suffered a 6-day consecutive decline. Are we in an oversold position?

IntroKLCI.png

If Rocketman decides to launch a missile, there could be more downside risks. Assuming that I would like to take a punt by taking a long position (i.e the KLCI is currently oversold), I may want to consider the following structured warrant:

Warrant Terms.png

Finding My Edge For A Long Position

To re-iterate again and again, I do not have the crystal ball to foresee what is going to happen in the next few days. More importantly, one should understand the trading edge before executing a position. So, what is the edge for this bet?

1.  Support, Support, Support

If you see the following hourly chart, there could be some possible zonal support around 1,761 ( a clear rebound). The next point of defense will be at 1,756.

FBMKLCI.png

2.  Implied Volatility < Actual Volatility

At current warrant price of RM0.05, the implied volatility of the underlying could be in the low range of 3% – 4%. Relatively lower than the actual volatility.

Implied Vol.png

Actual volatility has spiked up to 9.40% , as of today:

KLCI_VOLS.png

3. Seasonality may matter

With FBMKLCI-C3F, I have more than 180 days prior to the expiry of the warrant in March 2018. Based on the following seasonality table:

  • Possible profit taking opportunity in the months of October, December and March which appear to be historically positive (m-o-m basis)
  • Be cautious (with a possibility of taking stop-loss) in historically weak months of November and January

October Seasonality.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Why Implied Volatility So Low?

The implied volatility of an underlying may be low (i.e relatively lower than realised volatility of the underlying) due to numerous possible reasons – e.g future expectation that the underlying may go up (for put warrants) or go down (for call warrants), low liquidity for the derivative (possibly newly traded), declining market risks and other tonnes of reasons. What surprises me is that the newly traded structured call warrant FBMKLCI-C3E (06503E) (underlying: FBMKLCI) has a relatively low implied volatility.

Continue reading “Why Implied Volatility So Low?”

A Statistical View Of Structured Warrants (FBMKLCI)

In this latest update on structured warrants, a simple multi regression has been performed on structured call / put warrants (with FBMKLCI as underlying) in order to understand the impacts of (1) remaining days to expiry (2) strike price ; and (3) conversion ratio on  warrant premium / discount.

Continue reading “A Statistical View Of Structured Warrants (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”

Volatility & FBMKLCI (Update)

Historical Volatility: What we know so far

Analysis of historical volatility or statistical volatility shows that in rising prices, volatility tends to be lower as risk or fear subsides. When prices are declining, volatility will tend to increase.

The graph below highlights the relationship between FBMKLCI and its historical volatility (annualised, 30day), 10 day moving average volatility and 50 day moving average volatility.

FBMKLCI_May16_Vols(1).png

As shown above (e.g period : Jan-Feb 2015, Sep-Oct 2015, Feb-Mar 2016), when FBMKLCI declines, the historical volatility increases.Even in the recent selloff in May 2016, we saw a spike in the statistical volatility.

It is important to note that as the 10-day moving average volatility moves above the 50-day moving average, the market conditions are turning bearish. And as the 10-day moving average moves below the 50-day moving average, the market conditions are expected to turn bullish. When the 10-day moving average diverges far apart from the 50-day moving average, the FBMKLCI will experience correction. Currently (in May 2016), we saw the 10D moving average volatility crosses above the 50D moving average volatility, signaling a bearish market condition.

Implied Volatility: What may happen next

Implied volatility is the market expectation of the future volatility. This can be imputed from the traded options. The following table shows the structured call warrants (with the underlying: FBMKLCI) that are currently traded on Bursa and will be expiring from August 2016 onwards:

FBMKLCI_May16_Vols(2).png

It is observed that the average implied volatility from these structured call warrants is 15.8% which is relatively higher than the current historical volatility of 9.3%(as of 27 May 2016). Market expects more volatility in the next few months. Unfortunately, volatility does not predict the direction of the underlying. Based on the implied volatility of the structured warrants, there is 68% chance (i.e based on 1-standard deviation) that FBMKLCI may trade between 1,335.5 and 1,938.9 up to 31 Jan 2017.

 

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.