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The best way to trade the Singapore Index: SiMSCI warrants.

Wednesday, November 3, 2010

Macquarie introduces a new warrant to the Singapore market. Macquarie's SiMSCI warrants allow investors to take a leveraged view on movements in the broader Singapore sharemarket.

Macquarie's warrants allow you to take a leveraged exposure to the SiMSCI with no margin calls or forced selling, thus limiting your capital at risk. Macquarie has listed both call and put warrants, so you can potentially profit from both rises and falls in the market.

99.9% correlation with Straits Times Index (STI)
The MSCI Singapore Index has a basket of 30 stocks and tracks the Straits Times index (STI) very closely. In fact, the MSCI Singapore Index has a 99.9% correlation with the STI over a period of two years, and a 99.6% correlation over five years.

SiMSCI - the only liquid alternative to the STI
The SiMSCI is the name for the futures over the MSCI Singapore Index, and tracks it closely. The SiMSCI is much more liquid than the STI futures in terms of volume traded. In fact, the SiMSCI is the only liquid alternative to trade a Singapore sharemarket index.

For both futures expiring in August, the SiMSCI had 228,287 contracts traded (for the month of Aug 2010) while the STI futures only had 6 contracts traded over the same period of time.

Why SiMSCI warrants?
As the SiMSCI is a liquid and efficient futures market it provides a live tradable market reference price for the warrants to track, this makes it a more transparent and easy reference point for warrant investors. Investors can now see the live SiMSCI price at this website and also the dedicated live SiMSCI pricing page which includes a list of the current warrants.

Read more about it at

FAQ: What are warrants?
A warrant is a powerful investment tool that enables you to gain exposure to a security for a fraction of its price. Warrants can be used to either increase or decrease your level of risk and, unlike ordinary shares, they can be used to profit from both a rise and fall in asset price.

Macquarie Warrants are available over individual shares or indices, they are listed on the SGX and can be bought and sold like ordinary shares.

A warrant gives the holder the opportunity to buy or sell a share at a future date for a fixed price. The two basic types of Warrants are "Call Warrants" and "Put Warrants". Call Warrants give investors the potential to profit from share price rises. Put Warrants give investors the potential to profit from share price falls.

A Call Warrant gives the holder the right, but not the obligation, to buy the underlying share at a fixed price known as the "exercise price" at a future date or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share is above the exercise price. A Put Warrant gives the holder the right, but not the obligation, to sell the underlying share to the Warrant Issuer at the exercise price, or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share price is below the exercise price.

The price at which a warrant holder may buy or sell the underlying shares or the price used in determining the cash settlement amount is known as the exercise price.

A call warrant is said to be out-of-the-money when the exercise price is higher than the share price and in-the-money when the exercise price is lower than the share price.

A call warrant will be worthless if the share price is lower than the exercise price on the expiry day. However, with upward movements in the share price, the holder can still earn excellent returns trading the warrant prior to the expiry date.

The opposite occurs for a put warrant. It will be in-the-money when the exercise price is above the share price and out-of-the-money when the exercise price is below the share price. With downward movements in the share price, the holder can make profits trading the put warrant prior to its expiry date.



la papillion said...

Hi AK,

Wah, for a while I thought you are actually recommending warrants :)

Good for you, got lobang on such things ;)

AK71 said...

Hi LP,

After reading the write up on warrants, which I knew almost nothing about before, I am curious now. ;)

I would be happy to hear from readers who have some experience with warrants. :)

Anonymous said...

Hi AK,

I was trading covered warrants actively for a while, and tracking the behaviour of the put and call warrants vis-a-vis the movements of the underlying instrument. For a short while, I (stupidly) used covered (put) warrants to hedge my (long) portolio against a drop in the index.

What I found was that even though I got the direction of the move correct, the warrant price movement was often insufficient, or even opposite to the direction of the underlying instrument.

Readers with some background in options pricing, and some experience in trading these warrants will point out that warrant issuers consistently profit from these covered warrants by assuming a very high amount for implied volatility and time decay. In simple terms, the warrant issuers will always profit from these warrants, as they have sold you an option that is very expensively priced.

As a buyer of covered warrants you will only profit if you get both the direction, and the timing of the move correct. This is a tall order indeed (and if you do get it, its usually luck rather than skill.)

The only way, I think, to profit from covered warrants is to short them. Unfortunately this has been expressly forbidden by SGX, and many brokerages will not even allow you to enter an intraday short on these instruments.

I would urge you to do some more research on how these warrants are actually priced - Macquarie runs regular warrant workshops at the SGX, I found the speakers honest and knowledgeable.

If you are thinking of using a leveraged instrument on SIMSCI, why not just buy the SIMSCI futures outright? Transaction costs for SIMSCI futures are much lower than stocks, and you get a lot of equity exposure, reasonably diversified for a small margin.


AK71 said...

Hi AT,

Thank you very much for taking the time to detail your personal experience with warrants. I learned much from you comments! :)

Yes, Macquarie has quarterly seminars and I believe there is another one coming up soon. I agree with you that anyone interested in trading the SiMISC should attend the seminars.

Knowing me, I would read up on this more for knowledge than to do any real trading. Well, at least not for the time being. :)

la papillion said...


I played around with warrants when I first started the stock market (what a brilliant way to start right?). All the things that shouldn't be done I've done it all. What's worse was that I started with the more volatile HSI warrants rather than the more muted STI ones.

I found out the hard way that what AT had mentioned earlier was true. It's not fair to have the direction correct but the correct timing too. Some of the more liquid warrants are fine but when you're talking about market makers rigging up the buy/sell Q, it's just not fair anymore. Ironically, after I bought a book about warrants, I decided to quit it.

It's hard enough to perfect the timing, and to bet against the market marker is just too tall an order for me.

If S'pore is like US where we can actually write our own 'warrants', then things might be a different playing field. Till then, I don't think I would do it. With regards to the often mentioned use of warrants as a means to hedge your portfolio against market failure....I don't think that works. Most likely you'll lose on all fronts (i.e your portfolio drops and your put warrants dun correlate well to drop in index).

One good thing that came out for warrants for me is that I started learning about TA. It's just incredible that I can make money without knowing anything by trading warrants and just incredible lucky I didn't blow up. I think net net I make a little.

AK71 said...

Hi LP,

Wow, you were an adventurous guy! Thanks for sharing. I learn something about your past. :)

So, liquidity is important. Then, since SiMSCI is more liquid than the competition, it is a better choice?

"For both futures expiring in August, the SiMSCI had 228,287 contracts traded (for the month of Aug 2010) while the STI futures only had 6 contracts traded over the same period of time."

I agree with you totally that we should really read up and learn about the stuff we are thinking of going into before really going into it. Otherwise, we would be fighting blind. I fought blind many times in the past and ended up mortally wounded. :(

Well, you made some money. All's well that ends well. Your guardian angel works overtime, maybe. ;)

Anonymous said...

Time decay is what kills you for warrants. Not so much about the price movement, but a warrant devalues very fast overnight, not worth it for playing over a period of time, as even if you get the directions right, your time decay will cost you. I learnt a lesson from it. If you buy at close, in anticipation of open up or sell down the next day, you would already have lost 10-20% of the original amt through time decay.

If warrants has no time decay, then it would be a good bet hehehe


Raelynn said...

hello AK! i posted this in your precious metals blog but i kept getting an error message... so i'll post this here.

hello! comments on HSBC and JP Morgan's class action suit for shorting silver and manipulating silver futures?

by the way, apparently you can purchase physical silver fairly easily, Silver Bullion ( is an authorized distributor for Perth Mint silver bullions. alternatively, you may purchase the silver with Perth Mint directly but subject to minimum purchases and other admin charges depending if you are purchasing allocated or unallocated silver. will have to weigh between the pros and cons. for example, buying physical silver in singapore means you are subject to 7 percent GST and the annual deposit box charges ( whose charges have rose absurdly. unless you feel brave enough to put a safe deposit box at home) but it is right here in singapore. plus given that SGD is strengthening against the greenback, rise in the silver spot prices are a bit more "fair?" than say 2 months ago.

alternatively, let's say you sign up for an account with Perth Mint, unallocated silver takes about 1 week to obtain physical silver when you exchange your certificates for physical silver, but you do not need to pay for storage fees unlike allocated silver. apparently according to their FAQ, unallocated silver is akin to purchasing physical silver, in the event if you wish to exchange your certificate for physical silver and there is insufficient stock in the inventory, Perth Mint will obtain physical silver by hook or by crook and give it to you (which explains the one week waiting period) in order to fulfill their legal obligations. whereas allocated silver, means that your personal account's inventory will contain actual silver, or the inventory has already "allocated" silver to you which they cannot for any reason give to other ppl etc (which explains why you need to pay storage fees and the significantly shorter waiting time). the disadvantage will be that the SGD has not been strengthening against the AUD. (AUD and USD are currently almost 1-to-1, AUD to SgD is about 1.299 USD to SGD is about 1.282 according to at writing time). and of course, the point that you know you have physical silver, but you cant touch it. This is slightly different if you have a relative who is an Aussie PR/citizen, the account minimum is about half of that of foreigners.

it would seem that the Silver Savings Account for long term investors is a much more expensive option compared to those mentioned above...

p.s: i dont know how to recognize weakness in prices ^^".

AK71 said...

Hi Paul,

Thank you so much for sharing your experience here. :)

I appreciate as much feedback as possible from readers since this is a very different topic and one which I am not familiar with.

So, avoid time decay, buy Saizen REIT warrants? Sorry, I cannot resist. ;p

AK71 said...

Hi Raelynn,

Your comment in the Silver and Gold blog actually went through twice. Possibly, the error message was an error. ;p

Anyway, I have decided to publish your comment here instead. So, I will delete those in the other blog.

I have no comments on the alleged manipulation of silver's price. I recognise the strong fundamentals of silver and invest accordingly. I believe in my analysis and that's what counts for me. :)

Gold or silver?

I am not comfortable buying silver from the local distributor of Perth Mint's silver bullions. I believe another reader has mentioned them to me before.

OK, call me risk averse but I prefer to work with UOB, a name I am comfortable with. ;)

As for holding silver for the long term, I believe UOB's Silver Savings Account has relatively reasonable charges.

If we believe that silver is likely to appreciate a lot more than gold in future and that the rate of appreciation is likely to be quite rapid, "long term" could mean just 2 to 5 years. If silver doubles or triples within that time, the annual fees paid to UOB would be a pittance.

Having said this, I believe that due to the minimum service charge imposed by UOB for the Silver Savings Account, a purchase of at least $10k worth of silver would make it more cost effective. If we were thinking of just purchasing $1k or $2k worth of silver, the cost of maintaining the account might seem too high.

As for purchasing silver on weakness, I believe that a major support for the metal is at about US$20.20 an ounce.

Buy more silver on weakness.

Here is a good article on silver written on 4 Nov which I came across on Seeking Alpha. Do take time to read:

Silver Will Soar as Gold Becomes Too Expensive

Thank you so much for your comment and the time you took to write it in detail. :)

Anonymous said...

Hey AK,

STI warrants cannot be compared with saizen la, apple and orange, difference so big.

warrants are hard to play though. I am looking for funds which track STI but they are expensive, out of my reach

AK71 said...

Hi Anonymous,

Haha... I know. I was being cheeky. ;)

You might want to consider attending the quarterly seminars which Macquarie is organising. Like AT commented, they have good guest speakers who honestly share their experience. Details coming up soon. Look out for it. :)

Could you include your name or initials in future comments? Thanks.

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