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warrant stop loss

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SimonPB
Valued Contributor
so we hit the problem we've hit before and comments would be appreciated.

If we enable a stop loss on a warrant to be set on the underlying this will remove the problem of warrants not trading at stop loss level and as such not triggering. So instead of putting a stop loss on the warrant at 40c one would put it on the underlying at say R230 with that value more or less equaling the 40c on the warrant.

All well and dandy, but then what happens when the stop loss triggers off the underlying? At what price do we send the warrant to market? 40c? But what if your calcs as per warrant value are wrong due to time decay, error or whatever? We can't send the warrant @market in case the issuer is out to lunch and some camper buys from you at 2c.

So basically the warrant trader has to be extra smart to ensure their warrant value is very correct adn adjust accordingly for time decay. Are we then not just making a seriously complicated stop loss system that will just add confusion rather then effeciency?

Gotta say I am leanign towards the manual(ish) idea, traiing SMS alert, albeit again on the underlying?

comments.
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22 REPLIES 22
Not applicable
Simon, please restrict your posts to a max of 4 paragraphs. Your spelling goes for a tank @ no.5. Thank you.
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Not applicable
Only joking. About the stop-loss, nothing triggers but an sms to the account holder. Phone trade or live trade after that. Trader must still take rsespnssibilitie.
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Runbird
Contributor
I would also like to add that we should have the ability to create alerts on the TOPI. At the moment we can't do that.
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SimonPB
Valued Contributor
for topi alerts use stx40
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Not applicable
About the stop loss. Here's an idea, I am not so sure how feasible it is with regards to other warrents but it should work for all SBK warrents as you have the information needed. The stop loss should trigger on the underlying at say R230. From your argument the warrent should be valued at 40c, but the prob is you dont know where to generate the sell order. So why not just get the stop loss system to calculate the correct fair value for the warrent taking into account decay, gearing etc, which you should have for all the SBK warrents at least and then place the sell order at that fair value price and give the user the the choice to decide how many cents or percent he or she is willing to go below this fair value. Since seeing you update your matrix everyday everyone will have a good idea of where the fair values should be. Your automatic stop loss system can do all the maths and thus elimanting the calculation error that you speak of. Just a thought....
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SimonPB
Valued Contributor
ozone, for SB warrants no problem, for other issuers we don't have accurate data so a problem.
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cfm
Super Contributor
I have in the past thought of all sorts of schemes for an automatic stop loss. Some complicated, some not. And my final conclusion was that none will work for me. So I would be in favour of an improved alert system. Maybe the addition of a trailing alert.
Staying with the topic, a stop loss triggering from the last traded price of the underlying would be an improvement. There are drawbacks as mentioned, but it is much better than the current alternative.
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DCTrader
Super Contributor
Surely when committing yourself to a trade you accept a certain downside risk... say 20% for this example. No matter what instrument you trading that is the amount you willing to loose. So you buy a warrant at say 30c. You prepared to hold this instrument until your 20% barrier is reached. So when the warrant drops to 24c, your stop loss kicks in. Same applies for the trailing stop loss. Irrespective of time decay, etc etc, your 20% is your barrier when you want out. Going ex-div affects all instruments so that problem is not unique to warrants. Perhaps an sms alert warning that the share is about to go ex-div and that you should adjust your stop loss could work.
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SimonPB
Valued Contributor
the ex div problem is that teh underlyng falls and this would trigger a stop is we used the underlying while the warrant would not have moved as the div is priced in.
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DCTrader
Super Contributor
Well if it's priced in then the investor realises this and takes it into account. Bottom line is, what amount of your investment are you willing to loose? No matter what the underlying does, the stop should be set on the instrument used by the investor... that is where his cash lies. If he trades instalments then he must set his stop on that, same with futures, same with warrants. To set on the underlying brings in all sorts of complications like gearing, etc. Say now you've got a wave warrant on the TOP40... To set the stops on the index level would be a nightmare and require hours of advanced calcs trying to ascertain at what level your 20% level is hit on the warrant (If the matrix does not extend far enough in the required direction). Rather just place your stop on the warrant. You buy at 100c, you prepared to loose 20%, so you set your stop at 80c. Not being able to get your trade through at the stop amount is an issue that effects all warrant trades when the underlying has moved quickly and the warrant isn't liquid enough. Am I missing something?
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Not applicable
Hey Simon so problem solved. What better way to attract new customers and dominate the warrents market then using that stoploss system? LOL I'm sure many will just trade SBK than and you guys willl make even more money. P.S I charge royalties ;o)))
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kr_pto
Super Contributor
DCTrader, the problem is the liduidity of warrants. it could move 10% easily between one ruling price and another. so your stop may be 20%, but eventually only triggered on reaching 30% (or maybe even 50% if you'r really unlucky).
ultimately, i suspect it is an issue the market makers alone can solve. is it not a possibility that they push through 1 trade for each cusp movement, thereby ensure a constant flow of ruling prices? essentially at a mid point of bid and offer. since they keep the bid and offers up to date, the 1 item trades should be kept in sync? not sure of financial impact to market makers though. they would essentially have to be the buyer and seller and get some way around any brokerages JSE would charge.
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john_1
Super Contributor
Without the greeks from the other providers it is tough to make the changes needed I see your point, However if you set up the system that works for the STandard warrents as you have that info it will give you such a competitive advantage that they will either lose out or submit the greeks to you. And Until they do submit the info no stop losses on thier warrents or at least only the old system.
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DCTrader
Super Contributor
But that's my point... you can't trade an instrument that generally suffers from illiquidity (try say that word when you drunk), and then expect your stop loss system to be free of the same issues. Once your level is triggered, be it at 20% or even if it jumps past to 25%, then your trade is in the market just as it would be if you were watching the market. If it can't sell because the instrument isn't liquid enough then thats the risk you take trading in warrants. If you want to make sure of the sale, then you can just increase your level below your stop that you are prepared to sell at...
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kr_pto
Super Contributor
good point john. maybe SFM should look at it from a business perspective as an opportunity to add value and lock in additional potential clients (both to your website and to your warrants desk, if you guys were prepared to provide to other banks).
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Tango
Super Contributor
NB post - most people missing the point and completely over-complicating the matter. And I don't buy the 'trailing 20%' rule either. What if the instrument is geared 10x? You will only tolerate a 2% adverse move. If it's geared 3x, you will tolerate a 6% move. Why would your tolerance for a move on the underlying change depending on the gearing of an instrument? The correct way (IMO) to handle the additional risk of a highly geared instrument is through position sizing, not through a tighter stop. If you want to reduce risk, reduce position size, not stop level. You fix your acceptable loss as a percentage of your trading capital, and then adjust your position size to match this based on your stop level and gearing. The stop level is the level at which you are prepared to accept that you are wrong, not some arbitrary move against you. The fail-safes should be in your money-management rules - eg, no more than x% at risk at any time, no more than Y% loss in a single month.
The stop-loss answer is now easy - we chart the underlying, so we set our stops on the underlying. So we set alerts on the underlying at our stop level. And when the alert goes off we go into the market to find out what is happening and to close the position at the best price we can. Over the phone or online. Simple.
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john_1
Super Contributor
Tango good to see you are taking all that sage advise on board and you are absolutly right, But why oh why must we phone in when there are things called computers. Set the stop level on the underlying absolutly, but asutomate the system. Thats what we are trying to achieve. Because if I can get to a computer I dont need a auto stop system it when I cant I want it to work as I would.
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kr_pto
Super Contributor
hey tango. not sure that there is much discussion here about the trailing aspect to stoploss (or reducing exposure for that matter)? that would naturally follow if you could get a fixed stop loss working. the issue at hand is how to automate a stop loss with alerts. yes, one can (and really only option available at the mo) set alert on underlying, and then logon or phone. but that is living with a less than ideal situation (i.e. a what we in IT business refer to as a "work around"). what if you happen to be called out to birth of your baby? or to a funeral where cell phones have to be off. or horror of horrors got hit by a bus. any number of (albeit rare) situations could occur, and it would be nice to have a rule set to limit downside. else we could say "why bother having stop loss on underlying, just set alert and manually do it". just some more thoughts, rambling on...
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kr_pto
Super Contributor
automate a stop loss withOUT alerts that is
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