1 February 2012

STI Call Warrant activity accelerated through January

• For the month of January 2012, the STI increased 9.8%, reaching its highest level in more than four months.
  
• Activity of call warrants on STI has increased steadily over the past weeks, more than doubling from a daily average traded value of $0.41 million in the first week of January to $0.94 million last week.
  
• Meanwhile the STI call-to-put ratio rose from 0.6 in the first week of January to 4.1 last week.
  

The local benchmark FTSE Straits Times Index (STI) has risen for four consecutive weeks to kick off a positive start to 2012. For the month of January, the STI increased 9.8%, reaching its highest level in more than four months. The STI tracks the performance of the top 30 companies by market capitalisation listed on Singapore Exchange.

Meanwhile, daily traded value in Structured Warrants on STI has averaged about $1.0 million in January 2012. Notably, activity of call warrants on STI has increased steadily over the past weeks, more than doubling from a daily average traded value of $0.41 million in the first week of January to $0.94 million last week. The views of investors were also reflected in the STI call-to-put ratio which rose from 0.6 to 4.1 over the corresponding period.

The chart below illustrates the growth of the daily traded value in STI structured call warrants and decline in the daily traded value of STI structured put warrants. This was synonymous with volume trends.

Source: SGX

The price performance of STI call warrants in the first four weeks of January is shown in the table below, the three warrants expiring in February delivered returns in excess of 80% while the longer-dated warrant expiring in January next year has gained about 31%. The variation in returns reflected that the much greater time to expiry, the more probability for the underlying STI to move both up or down.

Shorter-term warrants offer higher effective gearing and may be more appropriate for investors with a strong directional view of the duration and extent of the underlying price movement.

Macroeconomic Events in January

On 25 January, the Singapore Department of Statistics (DOS) released data showing that Singapore’s inflation rose 5.5% on-year last month, down from 5.7% in November. For the whole of 2011, inflation averaged 5.2%.  Following which on 26 January, the Economic Development Board (EDB) said that Singapore’s manufacturing output rose 12.6% in December from the same month a year earlier led by a surge in activity in the biomedical sector, reversing a 8% drop from November. Next on the agenda is the 2012 Singapore Budget, due to be announced on 17 February and as reported by Channel News Asia, Prime Minister Lee Hsien Loong has stated that emphasis will be placed on sustaining the country's long-term competitiveness.

Benefits and Risk of Warrants Trading

Structured Warrants are Specified Investment Products, due to their potential complex nature to individual investors and associated risks. The benefits and risks of Structured Warrants are listed below:

Benefits:

•         Capital Efficiency: Structured warrants can provide investors with exposure to an underlying stock or index without committing the full amount of capital. In other words, warrants are therefore leveraged products and thus investors may free up their capital while maintaining a similar level of exposure to the underlying asset or otherwise increase their exposure for the same investment outlay

•         Through the buying of structured warrants, there is unlimited upside but limited downside: The maximum potential loss to an investor is limited to the warrant price, which is usually a fraction of the share price. The potential gain of a warrant may be unlimited as it depends on the movements of the underlying share.

•         Portfolio protection: A put warrant allows an investor to hedge against a fall in the price of a stock or portfolio or add flexibility to trading strategies in different market conditions.

Risks:

•         Leverage: Leverage is a “double-edged” sword. In addition to magnifying gains, warrants can also magnify losses when the value of the underlying asset moves against the warrant position. For instance, a fall in the price of the underlying share can lead to a larger percentage loss in the value of the call warrant. It is important that investors set take-profit and cut-loss levels as with other investments.

•         Limited life: Warrants have an expiry date and therefore a limited life. A warrant may expire before expectations are realised. Therefore it is essential that investors select a warrant that has sufficient time to expiry to match market expectations.

•         Credit risk: Warrants are issuer-led products. Credit risk is the risk that the issuer may not be able to fulfill its obligations in unforeseen exceptional circumstances.

Seminars & Resources

Investors can learn more about structured warrants from industry experts through these complimentary seminars:

Specified Investment Products

As part of the Monetary Authority of Singapore’s (MAS) initiative to introduce stronger measures and enhance requirements to further safeguard the interests of individual investors, Structured Warrants have been categorised as Specified Investment Products (SIPs).

SGX SIPs have structures, features and risks that may be more complex in nature. The MAS now requires broking firms to ascertain whether an individual investor has the relevant knowledge and experience to understand the risks and features of SIPs before allowing the individual to open an account to trade SIPs listed on both securities and derivatives markets.

SGX has introduced two online initiatives, a Customer Account Review Module and an Online Education programme, to support individual investors in their understanding and trading of SIPs listed on SGX. Click here to access these initiatives.

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