People who have invested in the stock market for a while will tell you there is no free lunch in the market.  Even if there is, it is usually arbitrage on cross border price differentials or a small sure profit during a takeover offer.  Such profits, if any, are usually very small and you cannot make a killing out of it.

However, I will demonstrate to you it is indeed possible to have free lunches in the market provided you know how to get them.  And these free lunches invitations come more frequently than most people would expect. And just yesterday (August 5th), Lee Ka Shing gave me a treat as his flagship Hutchison Whampoa Ltd smashed analysts’ expectations by achieving net profit of HK$6.45 billion.

Hutchison Whampoa share price soared 9.7% today in Hong Kong to HK$58.20 after it reported a 12% increase in first-half net profit to HK$6.45 billion, beating market expectations of HK$4.51 billion, and said its third-generation mobile-phone business was finally on track to make a positive contribution to its full-year results on an earnings before interest and tax basis.

You could have bought Hutchison Whampoa at yesterday’s price last night after learning about the earnings results if you know how to!

Ever since CIMB Investment Bank launched CBBC (Callable Bull and Bear Contract) in Bursa Malaysia recently, Malaysian investors who bought these instruments on the first days of trading must have learnt some painful lessons.

Such lessons include buying CBBC with credit card like finance charge(as in GAMUDA-JA) and not realizing the automatic call feature upon triggering Mandatory Call Event (like in BJCORP-JA).

There are some factors investors should look at before deciding to buy CBBC.  The first thing they should look at is the call price of the instrument.  Call price is very important because when the share price touches the call price, the CBBC dies.  It is therefore important to select a CBBC with a call price that is some distance away from the current share price.  Another point to note is that contrary to warrants, high volatility is no good for CBBC.  Warrants buyers benefit from higher volatility because it increases the probability of the warrants being in-the-money.  The pricing of warrants is such that its price should be higher when there is a surge in volatility.

The opposite is however true for CBBC.  When volatility of share price increases, the probability of share price touching the call price increases, thereby triggering a Mandatory Call Event which will mean the end of the CBBC.  Investors should hence avoid buying CBBC if they anticipate a spike in volatility of the underlying asset.