The glove put warrants poser

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KUALA LUMPUR (July 14): It is undeniably a bull market for the glove makers currently.

However, an interesting trend has also emerged in the local market on Monday — an equally frenzied buying of two newly-listed structural put warrants on Top Glove Corp Bhd (Top Glove-HA) and Supermax Corp Bhd (Supermax-HB).

The strong interest in the derivatives that hedge against a fall in share prices of Top Glove and Supermax has made many in the investing fraternity perplexed.

The prices of the two derivatives, a bear market tool, rocketed over 200%. Top Glove-HA soared by 207% and Supermax-HB by 291%, on the day when the two underlying stocks climbed to their all-time highs. Supermax saw its biggest ever share price leap of RM2.36 to RM15.98. Top Glove’s share price gained RM2.08 or 9.5% to RM24.

The large trading volumes recorded were another evidence of the strong interest in the two derivatives. TOPGLOV-HA was the most traded securities on Bursa on Monday, with 613.47 million units having changed hands, while Supermax-HB was the third most traded counter with 567.9 million units done.

In a nutshell, put warrants grant holders the right to sell the underlying shares at a specified price (exercise price) within a limited period of time (maturity). Structured put warrants are hedging tools. Investors tend to use structured put warrants to hedge against any big drop in the underlying share prices.

Some market observers commented that the surge in interest in the two put warrants, which made their debut just two weeks ago, could be attributed to the increasing number of glove bears in the market, although the bulls still swarm the market in general.

“No one could deny that the downside risk on those glove counters are heightening, as their share prices are trading at such hefty premiums. Such put warrants would allow investors to hedge their long position on the underlying shares,” said a market observer.   

Even so, the spike in the prices of the two put warrants has been astonishing, to say the least. Given that the premium of the two derivatives are near 100% based on the closing price on Monday, the hedging tools themselves have also become highly risky.

Based on the exercise price and conversion ratio, the put warrants are pricing the mother shares at RM2 for Top Glove and 30 sen for Supermax. “Investors will only make money if the underlying mother share drops below these two levels (assuming the investors hold onto the derivatives until the expiry dates). Is that possible?” explained a warrant specialist.

Nonetheless, structured warrants are a trading instrument so investors are unlikely to hold onto the derivatives until expiry date. In this case, the warrant holders who bought in earlier would have made handsome gains after the price rally on Monday, if they locked in their profits.