lessons I learned on trading warrants
Posted by Book Eater
I'm sure a lot of people earned money from the Philippine markets trading AT and the like. I was so focused only on HK markets that I wasn't able to ride most of the stocks in the Philippines except MEG and the rest which were bought previously pa which are now above cost. Haha.
The past week has made me age about 3 years older I believe.
I shall not discuss the entire swings of my portfolio account but basically I just want to narrate the things I learned by trading warrants in HK market.
*Warrants is a derivative product based on an underlying asset (HSI market, China mobile, u name it.). The warrants move depending on the delta (or the rate of change of the underlying asset moves). High delta would mean high correlation of the move. That means a 300-500 pts drop or up in the HSI market, if timed perfectly would yield about 30% worth of gains and possible losses if you are at the wrong side of the market. The volatility is astounding especially since the market makers will usually have an implied volatility (that often goes wrong.).
Specific Trading Lessons Learned on Warrants:
"Trade by the only rules that matter, your own rules."- Tradestation
Warrants, as I have learned by trading this week, is an effective "return kicker", as long as one manages the risk behind it. We don't want to be overtrading in warrants because it will wipe us out but maintaining good position sizing, respecting MACD crosses, and cutting based on our planned stops will help ensure a decent return and with good churn.
Note: Insights below are suited only for my trading personality (small position sizing and wide stops), Results and lessons will vastly differ if we're different, i.e. you're a very tight stop player.)
1.)Wait for a retest before entering. Do not anticipate a move else your prices will be too far from the right entry point.
2.) Maintain good position sizing. Allow for a lot of slippages especially with warrants because of its volatility.
3.) Any standard method of placing stops and targets will perform poorly as volatility changes dramatically.
On a very bad day where volatility could easily be 30%, put in only a maximum of 3% of account to risk only .9% if wrong. In this condition, I need to be consistently right 75% or more, else I will lose money in the long run.
Gains : 10% -- .3%
Losses: 30% -- .9% (before cutting, because large volatility swings will happen. We dont want a very bad shakeout.) When proven with the bounce, use #1.
On a flat volatility day, where volatility is expected to remain -/+10% only. One may hold a position size of 10% of account.
Gains: 10% -- 1%
Losses:10% -- 1%
Since risk reward is 1:1, we need to be right at least 50% of the time for this to pay off.
On a very bad day where only shorting possibilities can be taken, an aggressive stance must be taken. Risk 2% of account so one can buy 10% position sizing
Gain- 20% -2-4%
Lose- 20%- 2%
If you're ahead and you know it, increase the position size to 20% and don't allow a loss. Place a trailing stop if the price moves down back to your second purchase price.
Reward:Risk ratio here is 2:1- you just have to be right 33% or more of the time and this will pay off.
4.) Don't do overnight positions unless risk is very small. (1% of a/c max and expect a possible 20% move down).
Overnight position can only be .5% of account.
Gains 5%-- .25%
Losses 20% - 1%
Need to be right 80% or higher to get good rewards.
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Strategy: Earn .3% for 10 days ---3% (on a 3% capital swinging back and forth)
Earn 1% for 10 days ---10% (on a 10% capital)
Earn 2% for 2 days ---4% (on a 10% capital)
Earn .25% for overnight positions on 3 days --- .75% (on a 1.5% capital)
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possibility of absolute return of 17.75% on a very small position size (max of 10% of account being placed on warrants).
Downside risks: 1% of account for every wrong move.
Good luck trading:)
-Nix