The price and trading volume in the warrants rose sharply immediately after the article appeared on our website, as the table below clearly shows. The trading volume in that particular warrant for 19 January was more than three times that of all the other days in January combined! This was partly because of a single trade for 77,251 units at 146.5p a go, which went across the system at 12.49pm. By 3pm, the price was up to 154, netting that particular individual a £5,794 profit in just two hours - and almost £13,000 at the current price of 163p.
| Date | No. of trades | Low | High | Avg price | Value |
|---|---|---|---|---|---|
| 02 Jan | 1 | 116.50 | 116.50 | 116.50 | £1,463.24 |
| 05 Jan | 2 | 108.50 | 109.00 | 108.75 | £16,460.64 |
| 06 Jan | 3 | 101.50 | 105.00 | 103.00 | £20,186.55 |
| 07 Jan | 3 | 108.00 | 108.00 | 108.00 | £5,994.00 |
| 08 Jan | 3 | 116.00 | 120.50 | 118.50 | £11,965.04 |
| 12 Jan | 1 | 120.00 | £1,560.00 | ||
| 13 Jan | 1 | 128.00 | £986.88 | ||
| 14 Jan | 3 | 141.50 | 143.00 | 142.17 | £16,372.50 |
| 15 Jan | 2 | 145.00 | 150.00 | 147.50 | £1,490.00 |
| 16 Jan | 1 | 145.50 | £1,018.50 | ||
| 19 Jan | 23 | 141.50 | 153.50 | 148.8261 | £237,927.93 |
[Soruce: Topic3; high=highest price paid, low=lowest price paid. Average is not volume-weighted]
The article also prompted several reader enquiries:
"Re Simon's article, my only criticism would be that the market has fallen so sharply the SA67 rose sharply in price this week leaving the quandry of whether or not to buy at a price over 138p. I think the article was written last Friday but only appeared online on Monday. Does Simon still advise buying it at 163p? Perhaps it would be better if he could advise us a bit more in advance - eg buy SA67 if FTSE falls below 4400."
- D P Laing
"In Simon Thompson's latest columns, he buys a large amount of SA67 put warrants. I would be interested in his views on buying into alternative products, such as SA81 (strike 5300) and also SC21/22/23/24. The latter group clearly have a very different risk profile to SA67/81, but could be used as part of a portfolio approach?"
- Simon Wilson
"I am enjoying your book "Trading Secrets" very much. I invested £30,000 in the Society Generale Bear Accelerator when the FTSE 100 was at about 4300.
I was surprised that your second investment for 40% of your portfolio is on a cover option which expires in only March. If President Obama has a big influence then possibly shares might recover for three months. Have you not invested too much and accepted too much risk?"
- Mike Hammett
Do you recommend to place a stop/loss limit with your order? What % away from the buy-price should it be? Do you place it as a trailing stop/loss? I am trading often with warrants as well, but have been stopped out often because of volatility. Then I had once not placed a stop/loss and suffered a major loss as a result.
Also, when do you intend to take a profit if the trade comes favorable? Do you wait till the FTSE falls to the autumn low of 3665?
- Gerhard Hammerle
Simon Thompson, author of the article, replies:
On Monday 5 January I set out my my trading strategy for early 2009 in The Jigsaw Puzzle. The plan was firmly focused on shorting the FTSE 100 through covered put warrants once the risk:reward ratio on the trade was heavily in my favour. The convergence of several key indicators on that day and the week before suggested it was.
The article you are all referring to, '', was published online on Monday 19 January at 10:30am when the FTSE 100 was still trading in the range 4225-4250. The SA67 SG covered put warrants were priced at 138p. With the FTSE 100 collapsing to 4000, the warrants are now priced at 163p.
Interestingly, the FT30 index, which has led the FTSE 100 down during the bear market, fell through its November bear market low of 1382 on Friday 23 January. At the time of writing the FTSE 100 is sitting on the critical support level of 4000. I expect this support to fail to hold primarily due to severe weakness in the mining giants and oil majors. The resource-heavy Australian ASX 200 index fell 4 per cent to a new bear market closing low on Friday 23 January. So I still rate the SG put warrants SA67 a buy at this level.
I firmly expect the FTSE 100 will retest its October bear market low of 3665 within the next two months. If this scenario plays out then the warrants will rise to around 193.5p - implying a further 17 per cent upside from here.
In terms of asset allocation I have invested around half my £100,000 portfolio in the FTSE 100 put warrants which I feel comfortable with as the warrants are deep in-the-money and are relatively lowly geared (the warrants move around 2.5 times the movement in the underlying). Moreover, I do not expect to see an Obama rally as the problems facing the global economy are not going to change just because a change of President. In any case, we had already had a sharp bear market rally from those autumn lows, which was topping out.
Regards other covered warrants, there are SG put warrants with lower exercise prices such as SA81 (expires on 20 March 2009 with a strike at 5300) and SW11 (expires on 20 March 2009 with a strike at 4900). However, I was attracted to SA67 because I was only paying the equivalent of 3p per warrant in time value on the 138p purchase price. The other warrants mentioned have higher effective gearing and carry more time value, so if my investment call was wrong and the trade went against me, I faced deeper losses. So I am still comfortable recommending SA67.
