With current market condition, call-warrant holders, especially the HK-share linked ones, are finding themselves holding to more than just call warrants, but their dear financial health also.
The bearish market depletes the value of those call-warrant each day, many folds more than their respective mother shares. Frankly, there is little hope if one decided to hold them to maturity. So what can you do now if you still hang on to them from Day 1? Not a lot, except to learn and regret.
The bulk of these call-warrants in KLSE are issued by only two banks. The rest just wished that had got into the act early 2007 (yes, it is rather late for them now).
Sadly and deservedly, call warrants are fast becoming known as money-sapping products. The two banks understand this more than the rest, hence the relative paucity of new call-warrant issues these days.
But banks don't stand idly by, they have to do something. They need to make something. Shorting the market is still largely a taboo subject for the Securities Commission, so what else can banks do in bearish, difficult times?
This is way I start telling you about yet another derivative/structured product (new to our market). The issuer is none other than our friend, CIMB. They have introduced the Bull Equity Linked-Structure, or Bull ELS.
At a quick glance, this appears to be a sure-money investment. It's like betting on a leading horse on the final stretch of the course. It appears that you would have a good chance of cashing in on a winner. The investment tracked the price of the underlying shares, but these Bull ELS are issued at a seemingly steep discount. Good. And the expiry time is short: a month or so. Even better. So if the current share price stays the same or higher, you have bet on a winner. Easy, right?
This is how Bull ELS really works. Say I sell you a unit of Bull ELS for RM11.11**. The mother share at time of issue is always higher, in this example, it is RM11.80. Okay so far? Now for you to profit, the share needs to hit RM11.21 (the exercise price) and above at maturity. Now the real fun begins. The maturity period is ultra-short, only 24 market days! So as long as the underlying mother share is above RM11.21 in 24 days, you are a WINNER! Easy right? Why not, as the market price for the mother share is RM11.80 at the time of Bull ELS issue, the risk appears low.
Now, the truth. If the mother share price sky-rocketted well above RM11.21, your profit will be capped at RM0.10 per unit only and NOT more (which is approximately 1% upside in 24 days). It is RM0.10 because that is the difference between the issue price and the exercise price.
However if your share drops to well below RM11.21, you will have to pay for the difference. So you can see, the upside risk is limited and the downside risk is unlimited. Still attractive? I don't think so.
Can you seriously consider buying an investment product (in present day market condition) with unlimited downside risk for a chance to make 1% profit?? As they say in Hokkien, siaw.
Unfortunately, this is not how Bull ELS is being advertised to investors. There is a good reason why banks do not try to over-educate the public. It just does not serve their money-making purpose.
SC should seriously consider the following proposal: Banks should not be allowed to sell anything unless investors fully understand it.
Somehow, I think this will be ignored.
**the example I gave is real; CIMB is issuing SIME Bull ELS at the price quoted above, RM11.11.
The bearish market depletes the value of those call-warrant each day, many folds more than their respective mother shares. Frankly, there is little hope if one decided to hold them to maturity. So what can you do now if you still hang on to them from Day 1? Not a lot, except to learn and regret.
The bulk of these call-warrants in KLSE are issued by only two banks. The rest just wished that had got into the act early 2007 (yes, it is rather late for them now).
Sadly and deservedly, call warrants are fast becoming known as money-sapping products. The two banks understand this more than the rest, hence the relative paucity of new call-warrant issues these days.
But banks don't stand idly by, they have to do something. They need to make something. Shorting the market is still largely a taboo subject for the Securities Commission, so what else can banks do in bearish, difficult times?
This is way I start telling you about yet another derivative/structured product (new to our market). The issuer is none other than our friend, CIMB. They have introduced the Bull Equity Linked-Structure, or Bull ELS.
At a quick glance, this appears to be a sure-money investment. It's like betting on a leading horse on the final stretch of the course. It appears that you would have a good chance of cashing in on a winner. The investment tracked the price of the underlying shares, but these Bull ELS are issued at a seemingly steep discount. Good. And the expiry time is short: a month or so. Even better. So if the current share price stays the same or higher, you have bet on a winner. Easy, right?
This is how Bull ELS really works. Say I sell you a unit of Bull ELS for RM11.11**. The mother share at time of issue is always higher, in this example, it is RM11.80. Okay so far? Now for you to profit, the share needs to hit RM11.21 (the exercise price) and above at maturity. Now the real fun begins. The maturity period is ultra-short, only 24 market days! So as long as the underlying mother share is above RM11.21 in 24 days, you are a WINNER! Easy right? Why not, as the market price for the mother share is RM11.80 at the time of Bull ELS issue, the risk appears low.
Now, the truth. If the mother share price sky-rocketted well above RM11.21, your profit will be capped at RM0.10 per unit only and NOT more (which is approximately 1% upside in 24 days). It is RM0.10 because that is the difference between the issue price and the exercise price.
However if your share drops to well below RM11.21, you will have to pay for the difference. So you can see, the upside risk is limited and the downside risk is unlimited. Still attractive? I don't think so.
Can you seriously consider buying an investment product (in present day market condition) with unlimited downside risk for a chance to make 1% profit?? As they say in Hokkien, siaw.
Unfortunately, this is not how Bull ELS is being advertised to investors. There is a good reason why banks do not try to over-educate the public. It just does not serve their money-making purpose.
SC should seriously consider the following proposal: Banks should not be allowed to sell anything unless investors fully understand it.
Somehow, I think this will be ignored.
**the example I gave is real; CIMB is issuing SIME Bull ELS at the price quoted above, RM11.11.
2 comments:
Thanks for sharing this information, Allan. I was considering to buy it and was very excited about this opportunity...until I read your post! :)
The pleasure's all mine Penny. I work for an investment bank also, it would be a great disservice for everyone if we don't tell the whole truth. The more we know, the better it will be for investors and market generally.
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