Saturday, November 22, 2008

HSI Call Warrant Sold - loss taken

When the rally I had expected to follow the PRC stimulus package failed to materialise, I took to loss on the call warrants purchased earlier in the week . The sale price us HK$0.105 showing a loss of about 38%. This loss neatly erased the net gains on the four previous short term trades made this year.

The ability to lose 38% of my investment in a few days shows just how much volatility and implied leverage these instruments involve. While this volatility and implied leverage gives the opportunity to make a lot of money very quickly, as I demonstrated this week, it also works the other way when I get it wrong. To illustrate the point, the Hang Seng Index jumped about 5% (in response to the HKMA's stimulus package) after I sold on Friday. If I had delayed the sale, my loss would have been only about 16%.

Incidentally, with the markets being so volatile, a strategy of buying calls and puts at the same time and trying to trade out both sides at separate times may be a valid strategy.

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