Last 2 weekends, I tried to calculate the intrinsic value of APPLE-C1 and comparing with a few other call Warrants. I found out that there was one Call warrant (SINOPEC-C1) which was undervalued. The mother closing price on last 2 Friday was HKD 11.98 and the closing price from SINOPEC-C1 was 0.225.
My calculation is as below:-
Let RM 1 = HKD 2.34.
Exercise price = HKD 9.00
Entitlement Ratio = 5:1
(HKD 11.98 - HKD 9)/ 5 /2.34= RM 0.2547 (Each of the warrants worth about RM 0.25, 3 cents discount).
Initially I thought my calculation was wrong and I have double and triple checked on my formula and I found nothing was wrong. The next morning, I discussed with my friend on this and told him that I found this undervalued Call Warrant. Although the maturity date for SINOPEC-C1 was near(1 month from now), I told him that if we buy and straight away exercise we will earn 3 cents arbitrage profit from each warrant we have. Without much delay, he decided to give it a try and he bought 80k of Call Warrant and I said that I would share the profit and loss for 10% with him as that was his money. We bought the SINOPEC-C1 at RM0.23. Total = RM0.23 * 80k = RM18,400. We also checked the performance of mother share on that day and the mother share was going up exceed HKD 12 and the intrinsic value of the warrant became about RM 0.255. Shortly after we bought, the price of the SINOPEC-C1 went up to RM 0.26. We believe that that was the moment people realized about the intrinsic value of SINOPEC-C1. We were so lucky to buy the Call Warrant before other people realized about it. We already earned 3 cents from it on that day.
The next day, the Hong Kong market was Bullish and Sinopec was going up again, the intrinsic value for SINOPEC-C1 was going to RM 0.265 and my friend called his dealer to try to queue the selling the Call Warrant at RM0.275. We could not believe that during the trading hour, the mother share went up to HKD 12.40 (up 40 cents) on that day and the intrinsic value for Call Warrant went up to RM0.29 and our sale has been matched. However, the mother share closed at HKD 12.18 on that day and the intrinsic value of the SINOPEC-C1 was about RM 0.27.
We were happy as we made contra profit of RM 3.3k after deducting all the charges. We made RM3300/RM18400 * 100% = 17.93% in 2 days. Not Bad!