Last year, I made money and lost it again trading warrants. I was up $7000 in May, and in the months following the sub-prime crisis, saw my profits erode to nothing.
At the start of the year, I had already formed an idea of which sectors were in play. For Singapore in 2007, it was all about the IR industry, the property markets and the financial sector - specifically the banks.
I was fixated on this sectors and never went around to look at other companies. I was sure that these companies would report good earnings because the economic indicators and numbers looked good. Logically for me the best bet would be to go long on these stocks.
The earnings report were good. But being right does not guarantee profit.
(Stock prices are not a function of earnings alone, they're also a function of public perception of risk. People attach risk premiums to the risk-free rate of return and discount future earnings by a larger amount. Stock prices fall, system wide, when people perceive increased risk in the economy. that's why sub-prime crisis is such a bummer.)
On warrants:
1. As expiry nears, if the warrants weren't in-or-near-the-money already, then there's little chance for the warrants fair value price to move. Let it go if it doesn't fly.
2. Before buying a warrant, draw a timeline, figure out when the company will report earnings. Where possible model for Dividend effect and Earnings effect. As you draw nearer to that date, watch the warrants very carefully.
3. If warrants go down by 10%, exit position ASAP. Don't average down no matter how far away the date to expiry is.
On Trading:
1. Never trade with money you can't afford to lose.
2. Take small losses early.
3. Have a trading system. Back Test. Position size. And Keep good records.
4. Write down your Entry and Exit plan and stick to it.
5. Consistency is the key to Profits.
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