Friday, April 30, 2010

BJToto-CD or BJ-Toto-CF?

Some reader feedback to me that BJToto-CF has better value than BJToto-CD, implying I made a mistake. The reasons I’m responding to the comments so that we all can learn from each other. Let's look this issue from the persepective of present, past and future.

At this point time, it’s absolutely correct that CF has better value because it has lower strike price $ 4.00, 302 days to expiry date, 1.1% premium but has 8.3X gearing.

CD is obviously has less value because of higher strike price $ 4.387, 81 days before become worthless, 3.9% premium but twice gearing 16X. CD value eroding fast as the intrinsic value of time going down fast despite of higher gearing factor!

However, like I said, it’s always 20/20 when we look backward.

I made the transaction around Dec 11, 2009 at around $ 0.05 and CF did not exist yet as it was launched around Dec 13, 2009.

Around that time CD has 212 days to expiry, 9.3% premium but a great gearing of 20X. It has higher intrinsic value because it was the best deal in town, great gearing factor.

CF has at least 1 year before expire (launched Dec 13,09)with 4.7% premium but not so great gearing, selling about 0.155.

When I’m in mood of taking a bigger swing, I prefer to play it aggressive, maximizing gearing at reasonable premium and expiry date. A reader pointed to me CF has better value but I did not make the switch because I like the leverage factor.

For return comparison by putting the price in a real time decision scenario, let’s assumed that we bought CF at 0.155 and sold for 0.18-0.19 on the same day I sold CD, the return will be 16%-22% vs 18% of going for CD. In this case, return was not too much different because my gearing factor compensating the short-comings.

Unless you are very confident that the mother share will go a lot higher in 250-300 days, you may want to continue to hang on or even buy CF. It’s all depend on individual risk appetite.

However, I’ve been saying the corrections is getting closer while I look a lot more stupid because whenever I call for a correction, the markets go higher. S&P breaking 1,200 - can you believe that? I would prefer to wait until the sky is clear before going out for fun.

Hope this will put things in perspective. Have a nice weekend.


山下聖人 said...

Hi turtle, just to highlight something also. Besides CF not available at the time we buy CD, it should be note the mother price BJTOTO is kinda low at that time. If we are optimist,buying CD gives you a good return as its gearing good.

But at this point of time, buying CD would not be a wise advise as time is our greatest enemy here

Turtleinvestor said...

Correct, that is the exact message I'm trying to say. In December '09 -CD was great, now we shall never go back to -CD. -CF? No, I'm not thinking of going back to any warrants at all for a while.

K C said...

I think the biggest risk in buying BJtoto structured warrants now is the risk of BJtoto declaration of any high dividends like what happened last year when 30 sen dividends was declared, ex on 13/7/2009. This dividend which will be ex before the expiration of the warrants will lower the price of say CD by about 3 sen (10/3.73) which rendered CD practically worthless when it expires on 19/7/2010 as its intrinsic value now is only 1.4 sen (4.44-4.387)/3.73. Of course BJtoto share may run up on declaration of high dividend which may possibly increase the value of the warrants. It is hard to predict which way the price will go, but my guess the odds is against the warrant holders.

Turtleinvestor said...


Good comment. Do you blog? If not, do you consider one? Drop me a note once you've decided. Your blog will be on my link.

K C said...

Want to punt on BJtoto call warrants? Today's price: BJtoto=4.42, CD=0.05, CF=0.17.
I only recently explore the financial blogs which I found that I have learned a lot of things from you guys. I will find out later how to create my won blogs and share knowledge with others.
Lets look at some figures on CD and CF using Excel(Forget about CE because its risk-return is way too inferior to CD and CF). As I suggested before that dividend declaration soon will be a major factor on the reward on these warrants. Lets assume 2 scenarios, a dividend declaration of 30sen and 5sen respectively ex before expiry of the warrants. With 30 sen, CD's will probably 'go to Holland' as it is highly unlikely that the mother share can go up to RM4.87 (10% more) in 2 and a half months time. CF will have a profit of 2.3sen or 13% at that price on expiry which is more than 9 months away. That is the beauty of lower premium. On the other hand, if BJtoto goes up to RM5.00, CD can make 3.4sen per share, or 69% whereas CF makes 6.6sen, or 39%. That is the beauty of leverage.If the dividend is 5sen per share, CD will kaput unless BJtoto goes up to RM4.62 before expiry. The leverage effect will be similar. Because of the short duration of this CD, I kind of agree with Turtle and 'the Saint under the mountain' that it is not nice to play with CD as it is highly unlikely that BJtoto can go up to above RM4.62. As for CF, I differ from Turtle's opinion as I think CF is very nice to play. A leverage of 8-9 times is still attractive. Using option pricing model as a guide, CF is way undervalued, especially if the dividend declared is not too high.