The case of the very bad warrant hedge
I been meaning to write this but couldn’t find the time. Work have really driven me insane these few days.
Technical readings on the S&P 500 at the start of March 08 tells me that we could actually be in for more downside risk. since it broke the 200 day weekly moving average,the next forseable target is 1175 region. Thats a nearly 10% downside risk.
Wanting to take advantage of that and hedge the downside risk, I bought a put warrant that has a strike at STI 2800 level expiring on the 29th of April.
Having 2 months of time value should be good i thought. The problem is that everything didn’t work out.
- The lesson learn is that I am reading a S&P 500 chart and I bought a STI put. Although indices have become correlated, the correlation is not equal. Should have never did that.
- Because of that, the values did not rise as much as volatility between S&P500 and STI is different.
- The crux of going long and shorting to hedge is that you assume that your long positions are superior to market. Thus you are able to earn a good spread. The problem is that my long position is not superior to the market for these 2 months.
Because of that i lost 2% of my portfolio for nothing. Lesson learn. Although its just 2%, it hurts when u see the amount as it is in thousands.
Update: I put out a HSI put warrant last week and the strong uptrend have killed this one as well. Haiz. Lost is not 100% but glad i cut loss on this one.
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My personal experience with warrants is that it is very difficult to make money consistently with them.
You have to get both the direction and the timing correct.
In the long run, the issuers are the ones that make money.