APPLE (NASDAQ: AAPL) was oversold on 4 January

On 4 January, the jobless rate was announced as 5% and it was the worst in 2 years (Unemployment Up, Stoking Recession Fears , from Yahoo News). Following the news, Intel Corporation (NASDAQ: INTC) was downgraded by JPMorgan from "Overweight" to "Neutral" (Semiconductors Down on Intel Downgrade, from Yahoo News). These 2 news were enough to kill the USA Market or at least the Technology stocks on last Friday.
NASDAQ has the worst percentage drop since March 2003 (Nasdaq: Worst Percentage Drop Since March 2003; Biggest Point Drop Since September 2001, from the Barrons' Blog)

The following list is the drop of the Technology stocks on Last Friday:-
* Google (GOOG) fell $28.33, or 4.1%, to $657.
* Apple (AAPL) fell $14.88, or 7.6%, to $180.05.
* Research In Motion (RIMM) fell $9.47, or 8.4%, to $103.35.
* Amazon (AMZN) fell $6.42, or 6.7%, to $88.79.
* Microsoft (MSFT) fell 99 cents, or 2.8%, to $34.38.
* Cisco (CSCO) fell 63 cents, or 2.4%, to $26.12.
* Intel (INTC) fell $2, or 8.1%, to $22.67.
* VMware (VMW) fell $3.46, or 4.1%, to $80.49.
* NetSuite (N) fell $2.95, or 8.5%, to $31.69.
* IBM (IBM) fell $3.77, or 3.6%, to $101.13.
* Hewlett-Packard (HPQ) fell $2.78, or 5.6%, to $46.87.
* Dell (DELL) fell $1.62, or 6.8%, to $22.09.
* Advance Micro Devices (AMD) fell 52 cents, or 7.7%, to $6.25.
* Nvidia (NVDA) fell $2.75, or 8.4%, to $30.
* Seagate (STX) fell $1.20, or 4.9%, to $23.31.

I am holding APPLE-C1 in Malaysia Market, so, I am a bit concern on the APPLE share. APPLE was down due to the 2 news above and also speculation on the cut of production of iPhone(which I think it caused the oversold). Let's take a look at the chart for APPLE.


From the chart, APPLE was closed below 55 EMA and also below the Bollinger Band. It shows that it was oversold on Friday. I might be wrong, but I would like to be optimistic and confidence at the position I am holding at the moment.

So, with the drop of APPLE, APPLE-C1 in Malaysia sure will drop on Monday, there might have panic selling on the APPLE-C1 also. I think that it is the opportunity for me to buy more to average down my APPLE-C1 price. You might ask, is it dangerous to buy more since the USA market is volatile? Just take a look at APPLE related news at Yahoo (Apple News).
1. Apple: Goldman Ups Ests, Price Target; Advises Staying Long Heading Into Macworld, Earnings - Goldman Sachs raised earnings estimate and price target on APPLE.
2. Will Ditching DRM Ding Apple?
3. Apple Sinks on iPhone Cutback Talk - Speculation on the reduction in production for iPhones.

More news were positive on APPLE and everyone is talking about owning an iPhone including Malaysia. I also wish that I will have one in future. Plus, I do not really believe on the speculation. We shall know the moment of truth on the coming Apple Macworld 2008.

For your information, Malaysia Market was up for 31.29 points (2.18%) on last Friday and I think it was overbought. Following the drop of Dow Jone for 356.54 points(1.96%), I am expecting a downside on Malaysia Market on Monday with may be -20 points. Too Bad, I can not Short the stocks in Malaysia.

Sinopec Call Warrant (SINOPEC-C1)

Issuer	OSK Investment Bank Berhad ("OSK")
Underlaying Share	China Petroleum And Chemical Corporation or SINOPEC(HKSE:0386)
Entitlement Ratio	5 Warrants to 1 Share
Listing Date	5 July 2007
Expiry Date	7 Months (31 January 2008)
Exercise Price	HKD 9.00
Issue Price	RM0.13
Settlement	Cash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 5 – Exercise Expenses]

How to play Call Warrant?

When I told one of my friends that I was doing analysis on Call Warrants, he told me that it was better to go to Genting Highland to gamble using probability. Well, I did not agree with him as the following reasons:-

1. Most games in Genting Highland, you are playing against the house. The boss of Genting Highland might uses millions of dollars to hire experts to design a system to make sure that your chances of winning are greatly reduced.
2. On the other side, buying call warrants is you are playing against all ordinary people which I believe less than 30% are exactly know what they are doing. The rest are just the followers.

People say Call Warrant is a risky investment vehicle. There is no doubt it is risky when you buy it when you know nothing about it. It is more risky if you buy it when you have a little knowledge about it (A little knowledge is more dangerous than no knowledge).

In my opinion, to start off with the Call Warrant, you will need to understand a few basic things:-
1. Maturity/ Expire date for Call Warrant
2. Exercise price
3. Premium or Discount of the current Call Warrant Market price
Please refer to my other post for information (Malaysia Warrants and Call Warrants)

The above 3 items are the most basic that a Call Warrant player MUST understand. The next thing that someone needs to learn is his/her own risk appetite or risk tolerance. The rule of thumb:- Only invest the money that you can afford to lose.

For example, My friend and I bought SINOPEC-C1 2 weeks ago and we earn money from it. We came to the decision to buy after doing some analysis.
What we have done?
1. Comparing the Market price of Call Warrant and found it was at 3 cents discount.
2. We knew the maturity date was near (1 month)
3. We knew the mother share very well, it was an Oil and Gas company. So, we would expect that its price might be a bit volatile and the changes of the oil price might move the share price.

Our risk Tolerance:-
1. Since the maturity of SINOPEC-C1 was near, we will not give it much room.
2. The Mother share was HKD 11.98 at the time we bought the SINOPEC-C1 at RM0.23( 2 cents discount). We calculated our risk as below.
Refer to my other post on Intrinsic value of SINOPEC-C1,


The intrinsic value of SINOPEC-C1 should be 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).

We assume that the mother share will drop the day after we bought. What will be the price of the mother share if we were to break even on the Call Warrant.

RM0.23 = (HKD BE - HKD 9) /5 / 2.34
HKD BE = (RM 0.23 * 2.34 * 5) + HKD 9
BE = HKD 11.691

So, our break even point was at about HKD 11.70.
HKD 11.98 - HKD 11.70 = HKD 0.28 (2.34%), From here, we have the risk for the mother share to drop more than HKD 0.28 or 2.34%.

We have closely monitor the mother share of the day we bought and the next day and luck was on our side as the mother share was bullish on those 2 days. The oil price was going up also on those 2 days.

If you were to ask me how to play Call Warrant?
It is all depends on your Risk Tolerance and your Expectation of Return. In our SINOPEC-C1 case, we were able to have the risk for the mother share to drop HKD0.28 ( or 2 cents for each warrant) and we have expected to earn at least 3 cents (by exercise it).

In my next post on Call Warrants, I will compare some of the risky Call Warrants(out of money too much) and some Warrants which are near to their intrinsic values.

Intrinsic value for Sinopec Call Warrant (SINOPEC-C1)

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!

Why I choose Apple Call Warrant?

I have missed the opportunity to subscribe to Google Call Warrant which was listed on 14 November 2007. Since then, I asked my Remisier to alert me if there is any good Call Warrant that will be listed in future. On 27 November 2007, my Remisier called me and let me know that there were 4 new Call Warrants that will be listed on 11 December 2007. The closing date was 27 November 2007 (4 pm) and I must deposit money to buy on that day. There are 2 Call Warrants that drew my attention which were: Apple Call Warrant and Exxon Mobil Call Warrant.

I used some time to do my own research on these 2 Call Warrants and below are some comparisons that I made during that day.

Underlaying Share	Apple Inc. (Nasdaq:AAPL)	Exxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio	1200 Warrants to 1 Share	500 Warrants to 1 Share
Exercise Price	USD $171.50	USD $86.00
Issue Price	RM0.11	RM0.09
Premium	20.44%	14.32%

At the first glance, Apple Call Warrant seems like more expensive than Exxon Mobile Call Warrant as it has higher Premium and the issue price for Apple is 2 cents more than Exxon Mobile.

I did some simple calculations as below:-
(Let Currency conversion USD $1 = RM 3.33)

Underlaying Share	Apple Inc. (Nasdaq:AAPL)	Exxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio	1200 * RM0.11 / 3.33 = $39.64	500 * RM0.09 / 3.33 = $13.51
Exercise Price	$171.50	$86.00
Total Amount	$39.64 + $171.50 = $211.14	$13.51 + $86.00 = $99.51
Market Price on 26 November 2007	$172.54	$85.68
The difference	$211.14 - $172.54 = $38.6	$99.51 - $85.68 = $13.83
Percentage difference	$38.6 / $172.54 * 100 = 22.37%	$13.83 / $85.68 * 100 = 16.14%

From the table above, I learned that for the Apple Call warrant to have the value of RM 0.11, the Apple share needs to increase by $38.6 or 22.37% within 7 months while for Exxon Mobil Call Warrant to have the value of RM 0.09, the Exxon Mobil share needs to increase by $13.83 or 16.14% within 7 months. If looking for the calculation perspective, most people will choose to buy Exxon Mobil Call Warrant.

I was pondering for a while on my calculation and I decided to look at the technical analysis of both the shares.


The above was the Apple Chart that I saw on 27 November 2007. The share price was consistently stayed above the 144 Moving Average and it rarely touched the 55 21 Moving Average. To me, it is a very strong Stock.


The above was the Exxon Mobil Chart that I saw on 27 November 2007. The share price was volatile and I think that the share price is heavily depends on the oil price. I did a quick search on CNBC.com for any news on the oil price and I found that Saudi Arabia Saudi oil minister, convinced the rest of Opec to agree an output increase of 500,000 barrels a day, as a contribution to the world’s economic stability. This news might not be good for Exxon Mobil.

As a result from that, I also knew that Apple has many strong products like IPod, IPhone and most importantly the Christmas Day is coming soon! The strong revenue on December could bring the Apple share to the new High which I would expect it to break the Natural Resistance at USD $200. I have decided to buy Apple Call Warrant on that while while my Remisier told me that most of his clients chose Exxon Mobil Call Warrant.

I have a strong feeling that I will be Right. The moment of truth will be in the next few months. I will keep posting update on this.

Google Call Warrant (GOOGLE-C1)

Issuer	OSK Investment Bank Berhad ("OSK")
Underlaying Share	Google Inc. (Nasdaq:GOOG)
Entitlement Ratio	3000 Warrants to 1 Share
Listing Date	14 November 2007
Expiry Date	7 Months (6 June 2008)
Exercise Price	USD $680.00(100.4% of the Reference Price)
Issue Price	RM0.11
Reference Price	USD $677.07
Premium	15.03%
Settlement	Cash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 3000 – Exercise Expenses]

Exxon Mobil Call Warrant (EXMOBIL-C1)

Issuer	OSK Investment Bank Berhad ("OSK")
Underlaying Share	Exxon Mobil Corp. (NYSE:XOM)
Entitlement Ratio	500 Warrants to 1 Share
Listing Date	11 December 2007
Expiry Date	7 Months (3 July 2008)
Exercise Price	USD $86.00(98.90% of the Reference Price)
Issue Price	RM0.09
Reference Price	USD $86.96
Premium	14.32%
Settlement	Cash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 800 – Exercise Expenses]

Apple Call Warrant (APPLE-C1)

Issuer	OSK Investment Bank Berhad ("OSK")
Underlaying Share	Apple Inc. (Nasdaq:AAPL)
Entitlement Ratio	1200 Warrants to 1 Share
Listing Date	11 December 2007
Expiry Date	7 Months (3 July 2008)
Exercise Price	USD $171.50(97.97% of the Reference Price)
Issue Price	RM0.11
Reference Price	USD $175.06
Premium	20.44%
Settlement	Cash Settlement [Cash Settlement Amount = (Settlement Price – Exercise Price) / 1200 – Exercise Expenses]

Malaysia Warrants and Call Warrants

I have involved in Malaysia Stock Market for sometime but I did not trade actively. Comparing with NYSE, Bursa Malaysia is a relatively small market and people say that it can be easily manipulated by some fund managers. Therefore, some serious investors in Malaysia only invest their money in Blue chip companies. Well, Learning USA market is my major focus as I think that USA market is more efficient compare with Malaysia Market. But I will still look into Malaysia's market to improve my general knowledge and to look for good opportunity to invest in some good stocks or products.

Recently, I did a research on Warrants and Call Warrants in Malaysia Market. Some people without much knowledge on the Warrants would say that it is risky to buy Warrants or Call Warrants. Actually I think that it is an interesting product that you need to spend sometime to understand before buying and the return could be many times greater than the ordinary share. It is only risky if you do know what you are buying. For your information, Malaysia Market does not allowed short selling, so, there is Call Warrants but not Put Warrants in Bursa Malaysia.

What are Warrants or Call Warrants?
Basically, these Warrants and Call Warrants are mainly for investors to have more choices in deciding their investment. These 2 products give the holder the right but not the obligation to subscribe a specific number of ordinary shares(Mother shares) at a specified price within a specific period.

Differences between Warrant and Call Warrants are as below:-

	Warrants	Call Warrants
Maturity Date	Longer(up to 10 years)	Shorter(up to 2 years)
Issued Company	The Company itself	Third Parties

These 2 product must be exercised on or before the maturity date, if not it will expire and becomes worthless.

There are 2 categories of warrants:-
a. American-style - Warrants can be exercised at any time until the maturity date.
b. Europeans-style - Warrants can be exercised only at the maturity date.

As far as I know, there are 2 different types of settlement of warrants:-
a. Cash settled - you will get cash after you exercise the warrants
b. Share settle - you will get the mother shares after you exercise the warrants