Buying insurance for stocks using warrant

[GPD]

Hi all,

Has anyone tried using warrant as a way of insurance against a stock price falling?

In theory if I buy X lots of stock A at say $2 and X lots of put warrant (seems like SG only got European type) with exercise price of $2.20 (say I paid $0.40 for it). Assuming on expiry date, stock fell to $1. I can sell X lots at $2.20. Since I paid $0.40 per warrant for it. So I loss $0.20 times X lots rather than $1.00 times X lots. If on expiry date, stock trades at $3.00, then I just let the warrant expiry.

Using SGX and its warrant MBEPW140303 as an example. This warrant was listed on 16 Oct 2013 with an expiry date on 03 Mar 2014 with an exercise price of $7.80. On the date of its listing SGX was trading at $7.20 - $7.28. Supposedly you need to paid more than say $0.60 for someone who is willingly to sell to you.

Some questions:
1. Is my understanding on how using warrant as an insurance works right?
2. I cannot find any trades done on this particular warrants since listed. Is this open to retail investors and if so, can it be bought through the electronic trading platform?
3. Based on SGX today closing price of $6.95, I suppose someone must offer at least $0.85 to get it?

Grateful for any teaching!

Thanks.

[specuvestor]

Theoretically yes. Problem is your insurance cost which in your example has yet to include time value, just intrinsic value. And these need to be constantly rolled over.

Based on your example you are paying 20% premium a year. Does that sound high or painful to you? Problem with option hedging is intrinsically it forces you to market time, either in terms of when to buy the insurance, and also when you think the expiry should be.

[CityFarmer]

Theoretically yes. Problem is your insurance cost which in your example has yet to include time value, just intrinsic value. And these need to be constantly rolled over.

Based on your example you are paying 20% premium a year. Does that sound high or painful to you? Problem with option hedging is intrinsically it forces you to market time, either in terms of when to buy the insurance, and also when you think the expiry should be.

Derivation like warrants can be used for hedging (insurance) or speculation.

For hedging, the question of when to buy and expire should be easier to answer, without timing the market.

But for speculation, timing of market is a major part of the game, and where the risks are.

[specuvestor]

Academics will tell you that delta hedging intrinsically is a zero sum game Perfect hedge means doing something for nothing.

PS London whale could actually be a victim of delta hedge:

"So as the market rallied they bought more and more and with the market selling off, they are forced to sell more and more "
http://www.zerohedge.com/news/how-jpms-h...easy-chart

[CityFarmer]

Academics will tell you that delta hedging intrinsically is a zero sum game Perfect hedge means doing something for nothing.

PS London whale could actually be a victim of delta hedge:

"So as the market rallied they bought more and more and with the market selling off, they are forced to sell more and more "
http://www.zerohedge.com/news/how-jpms-h...easy-chart

So the hedging done by most CFOs are doing something for nothing?...

[specuvestor]

Topic is stock hedging... business operational hedging are different: you actually produce something, and most of the time they market time as well which makes the strict definition of hedging oxymoron. Even SIA dont have a consistent mechanical oil "hedge".