Punting warrants can bring investor big gain when the gearing is high.  And the gearing of warrants is highest when the warrants are expiring soon and are trading out-of-money.

A good way to derive big gains from company warrants is to buy those warrants within striking distance of being in-the-money with expiry a few months down the road.  These types of warrants typically trade at very high gearing so that a significant move in the underlying share price can bring about gains in excess of 100% in warrants price.

A case in point is the warrants of Golden Frontier Berhad (GFB-WB).  At the beginning of the year, the underlying share was hovering just above RM1.00 and the exercise price of the warrant is RM1.44.  As the mother share was not very actively traded and its volatility was very low, there was not much interest in the warrants.

Nevertheless, the share price of Golden Frontier staged a significant rally in the last few months, chalking gains of over 50% as the company reported a substantial rise in profit.  This is a 10-year high for the stock and now some chartists are even targeting much higher price to come.  The price of GFB-WB rose from below 10 sen to about 30 sen at the time of writing during the period when the mother share made a big move.  Now the warrant is in-the-money and any further rise in the underlying share will be tracked quite closely by the warrant.

Are there any more of such gems available?

The table below is the list of warrants expiring in 2010 and there are many warrants trading at double digit gearing.  All punters have to do is to choose a warrant (currently out-of-money) with the potential of being in-the-money and the gearing of the warrant is very high.  To mitigate losses in the event of time running out, maybe it would be best to choose a warrant with low absolute price.

Some research on the underlying share is advisable.  Choose the underlying share which is about to report a big jump in profit and the price of the underlying has not reflected the big jump in earnings yet.  Of course it would help if the valuation of the underlying share is not demanding such as those trading at a few times P/E ratio.

If investors are willing to do some homework, finding such homerun candidates may not be as difficult as we think!

Alan Voon

Warrants Specialist