Warrant Deception

Sometimes it amazes me to see the kind of money one can make or lose trading on warrants, be it the normal company issued warrants or call warrants ,
all it takes is the mother share to move  up with volume and before your very eyes the warrants will trade with such exuberance and velocity as if there is no tomorrow....

Granted everyone wants to make a quick kill and pocket some easy cash ,but the late entrants may be in for a nasty surprise if they fail to sense nor see the reversal in which case they will be left holding the baby ie in some cases the value can come to a big fat zero if held to maturity !

It would be prudent to at least check the following "basic ' facts before one ventures into warrants..

a) the period to maturity...the call warrants usually has a one year maturity ( which is short in share market terms )

b ) the conversion ratio....a 1: 1 (typical of normal warrant ) is obviously "better " than a 3: 1 (which is common in call warrants )

c ) conversion price ....can be tricky to a naive retailer who only considers the absolute trading price without taking into account the conversion price and conversion ratio...in fact in recent days you can easily spot warrants being bought up without apparent reference to either conversion price or ratio ...in some cases not  even the impending maturity period...do they expect the mother share to appreciate by another 30 % in the next one month ?

All said ,a little bit of homework before you invest may save you the heartache and headache (and hole in the pocket ) at a later date ...


Chris Choo