When markets crash, most traders see disaster. Smart traders see opportunity. In my Nanyang Siang Pau column "股票捞底异术" (Bottom-Fishing with Structured Warrants: An Unusual Technique), I introduced a powerful strategy: using call warrants as leveraged recovery plays after market sell-offs.
The logic is simple — when quality stocks drop 10-15% on panic selling, they almost always bounce back. If you buy call warrants on these stocks during the panic, the leverage amplifies the recovery. A 5% stock recovery can translate to a 25-40% gain in call warrants with 5-8x effective gearing.
Why Bottom Fishing Works Better with Structured Warrants
Leverage Amplifies the Recovery
When a stock drops from RM5.00 to RM4.50 (a 10% decline) and then recovers to RM4.75 (a 5.5% bounce from the low), your stock profit is RM0.25 per share. But a call warrant with 6x effective gearing captures approximately 33% gains on the same 5.5% stock recovery — dramatically more profit for the same capital deployed.
Capital Efficiency
You don't need RM50,000 to bottom-fish on a blue chip. With structured warrants, you can gain meaningful exposure to the recovery for RM3,000-5,000. This means you can bottom-fish on multiple stocks simultaneously, diversifying your recovery bets.
Limited Risk
Your maximum loss on a call warrant is the premium you paid — nothing more. Unlike margin trading or CFDs, you cannot lose more than your initial investment. This built-in loss limit makes warrants a safer vehicle for contrarian trades.
Warren Mak's Bottom Fishing Strategy: Step by Step
Step 1: Identify Panic Selling, Not Fundamental Collapse
Not every drop is a buying opportunity. Bottom fishing works when:
- Quality stocks (blue chips, market leaders) drop due to broad market panic — not company-specific bad news
- The drop is driven by sentiment (fear, FOMO selling) rather than deteriorating fundamentals
- The stock reaches a strong historical support level
- RSI drops below 30 (extremely oversold) with high-volume capitulation
As I discussed in my column "波动中乘风破浪" (Riding the Waves of Volatility), the August 2024 market crash was a classic example — global panic created buying opportunities across quality stocks that recovered within days.
Step 2: Select the Right Call Warrants
For bottom-fishing, your warrant selection is critical. Apply the standard 7 criteria with these adjustments:
- Time to expiry: Minimum 2-3 months. Recoveries don't always happen instantly — you need time buffer to avoid time decay eating your position
- Moneyness: At-the-money or slightly out-of-the-money. These offer the best leverage for recovery plays
- Effective gearing: 5-8x. Enough leverage to make the trade worthwhile, but not so much that minor fluctuations trigger stop-losses
- Liquidity: Must be liquid. You need to exit quickly when your profit target is hit
Step 3: Scale In — Don't Go All-In
This is where my Nanyang column "分批入场" (Scaling In) strategy becomes essential:
- Divide your capital into 3-4 portions
- First entry (25%): When the stock hits your first support level
- Second entry (25%): If the stock drops further to the next support
- Third entry (25%): At a deeper support level or after a capitulation candle
- Reserve (25%): Keep in cash for unexpected further decline or a different opportunity
This scaling-in approach ensures you don't go all-in at the wrong level. If the stock keeps falling, your average entry price improves. If it bounces from the first level, you still have a meaningful position.
Step 4: Set Your Profit Targets
From my overnight trading strategy column, once your call warrants gain 25% or more, you have three exit options:
- Sell 100%: Lock in the entire profit — the safest choice
- Sell 50-70%: Recover your capital and let the rest ride as a "free" position
- Hold with a trailing stop: Move your stop-loss up as the recovery continues
Step 5: Use Stop-Losses Without Exception
Set a clear maximum loss before entering. If the recovery doesn't materialise and the stock breaks below your final support level, exit immediately. A 15-20% loss on a warrant position is recoverable. A 70-80% loss is not.
- Identify Panic Selling
- Select the Right Call Warrants
- Scale In
- Set Profit Targets
- Use Stop-Losses
3 Bottom Fishing Scenarios for Malaysian Traders
Scenario 1: Blue Chip Panic Dip
A blue chip like Maybank or CIMB drops 5-8% in a week due to general market weakness — not company-specific issues. Buy call warrants with 3-month expiry, scaling in over 2-3 days. Target a 3-5% stock recovery (15-30% warrant gain).
Scenario 2: HSI Crash Recovery
The Hang Seng Index drops 1,000+ points in a single session on panic selling. Buy HSI call warrants in the afternoon session when the selling exhausts itself. HSI typically recovers 30-50% of the drop within 2-3 days.
Scenario 3: Sector Rotation Dip
Technology or banking sectors sell off while the overall market is stable. This sector-specific weakness often reverses within 1-2 weeks. Buy call warrants on the strongest stock within the beaten-down sector — it will typically lead the recovery.
- Blue Chip Panic Dip
- HSI Crash Recovery
- Sector Rotation Dip
Mistakes to Avoid When Bottom Fishing with Warrants
- Catching a falling knife: Don't buy warrants on a stock that's dropping on bad fundamentals (fraud, revenue collapse, regulatory action). These aren't panic dips — they're justified declines
- Going all-in at once: Always scale in. The market can stay irrational longer than your warrant can stay alive
- Buying warrants too close to expiry: A 2-week warrant is useless for bottom fishing. If the recovery takes 3 weeks, your warrant expires worthless despite being right
- No stop-loss: Hope is not a strategy. If the stock breaks key support, exit and reassess
- Averaging down without a plan: Scaling in is planned. Averaging down out of desperation is gambling
- Catching a Falling Knife
- Going All-In at Once
- Too Close to Expiry
- No Stop-Loss
- Averaging Down Without a Plan
Frequently Asked Questions
What is bottom fishing with structured warrants?
Buying call warrants after a significant stock or index drop, anticipating a recovery. The leverage amplifies recovery gains — a small bounce in the stock produces large warrant profits.
When should I buy call warrants to bottom-fish?
Look for quality stocks that dropped 5-10%+ on broad market panic (not company-specific bad news), extreme oversold indicators, high-volume capitulation, and strong historical support levels.
Is bottom fishing with warrants risky?
Yes — timing is critical. If recovery doesn't happen before expiry, you lose your investment. Use stop-losses, scale in gradually, and choose warrants with at least 2-3 months to expiry.
Should I use warrants or stocks for bottom fishing?
Warrants offer leveraged returns (5% stock recovery = 25-40% warrant gain with 5-8x gearing) but carry time decay risk. Warrants suit experienced traders wanting maximum recovery profit; conservative traders should use stocks.
What is the scaling-in strategy?
Divide capital into 2-4 portions, buying at different price levels rather than all at once. This reduces the risk of buying too early and improves your average entry price.
