Every trader fears the same scenario: you hold a portfolio of quality Malaysian stocks, the market suddenly crashes, and you watch helplessly as weeks or months of gains evaporate in a single day. But what if you could protect your portfolio without selling your stocks?
That's exactly what structured put warrants allow you to do on Bursa Malaysia. In my Nanyang Siang Pau columns "对冲得法，小舍大得" (Hedging Done Right: Small Sacrifice, Big Gains) and "欲拒还赢，两全齐美" (Win-Win: Unique Hedging with Structured Warrants), I explained how put warrants act as portfolio insurance — a small premium today can save you from catastrophic losses tomorrow.
What Is Hedging with Put Warrants?
Hedging means taking an opposite position to reduce your risk. When you buy put warrants, you're buying the right to profit when a stock or index falls in price. If you already own the underlying stock, the put warrant gains offset your stock losses — like insurance for your portfolio.
Here's the key concept: a small sacrifice (put warrant premium) leads to big gains (portfolio protection). As I wrote in my Nanyang column: the cost of a put warrant is your insurance premium. If the market stays up, you lose only this small premium. If the market crashes, your put warrants surge in value, cushioning your portfolio losses.
Why Malaysian Traders Should Learn to Hedge
1. Markets Crash Without Warning
The August 5, 2024 market crash reminded every trader that markets can plunge 3-5% in a single session. Traders who had put warrant protection survived the crash with minimal damage — those who didn't saw months of profits wiped out in hours.
2. You Can Stay Invested
The traditional response to fear is to sell everything and move to cash. But selling means you miss the recovery. With put warrants as a hedge, you keep your stocks and still participate in the eventual recovery while being protected against further downside.
3. Insurance Is Cheap Relative to Losses
A typical put warrant hedge costs 2-5% of your portfolio value. Compare that to a 15-30% portfolio drawdown during a market crash. The maths overwhelmingly favour hedging.
4. Structured Warrants Are Accessible
Unlike options markets in other countries, structured warrants on Bursa Malaysia are traded on the same platform as stocks — no special account or approval needed. Any Malaysian trader with a CDS account can buy put warrants.
How Put Warrant Hedging Works: Step by Step
Step 1: Identify What You Need to Protect
Look at your portfolio and identify your largest, most concentrated positions. These are the stocks that would hurt you most if they dropped significantly. Check if structured put warrants exist for those stocks on Bursa Malaysia.
Step 2: Choose the Right Put Warrants
Apply the same warrant selection criteria:
- Liquidity: Choose put warrants with consistent bid-ask spreads. Compare by trading value (volume × average price), not just volume
- Time to expiry: For hedging, choose warrants with at least 2-3 months to expiry to avoid rapid time decay
- Moneyness: At-the-money or slightly out-of-the-money puts offer the best balance of cost and protection
- Effective gearing: Moderate gearing (4-6x) is ideal for hedging — extreme gearing makes sizing difficult
Step 3: Size Your Hedge
You don't need 100% coverage. Even a 30-50% hedge can significantly reduce portfolio volatility. Calculate your hedge size based on:
- How much of your portfolio you want to protect
- The effective gearing of the put warrant
- Your maximum acceptable loss
Step 4: Monitor and Adjust
Hedges are not "set and forget." Monitor your put warrants as market conditions change. If the market drops significantly and your puts have profited, consider taking profit on the hedge. If your puts are expiring, roll them to a later-dated series.
3 Practical Hedging Strategies for Malaysian Traders
Strategy 1: Portfolio Insurance During Earnings Season
Before quarterly earnings announcements, buy put warrants on your largest holdings. If earnings disappoint and the stock drops, the put warrant profits offset your losses. If earnings are good and the stock rises, you only lose the small put premium — a worthwhile cost for peace of mind.
Strategy 2: Index Hedging with KLCI or HSI Puts
If you hold a diversified portfolio of Malaysian blue chips, buying KLCI or HSI put warrants provides broad market protection. As I wrote in my Nanyang column: "The best hedging tool for HSI call warrants is HSI put warrants." The same logic applies — the best protection against a market-wide decline is an index put warrant.
Strategy 3: Event-Driven Hedging
Major events — US Federal Reserve decisions, Malaysia Budget announcements, China economic data releases — can trigger sudden market moves. Buy put warrants before these events as temporary insurance, then close the hedge once the event passes and uncertainty resolves.
Common Hedging Mistakes to Avoid
- Over-hedging: Buying too many put warrants turns a hedge into a speculative bet on the market falling. Keep the hedge proportional to your portfolio
- Using illiquid put warrants: Wide bid-ask spreads eat into your hedge effectiveness. Always check liquidity before buying
- Hedging too late: Put warrants become expensive after the market has already started falling (implied volatility increases). The best time to hedge is when markets are calm and premiums are low
- Forgetting time decay: Put warrants lose value every day due to time decay. Don't hold a hedge indefinitely — have a clear time frame
- Not taking profit on the hedge: If your put warrants surge 50-100% during a market drop, consider taking profit. The hedge has done its job
Real-World Example: Hedging During the August 2024 Crash
On August 5, 2024, global markets plunged in a wave of panic selling. As I discussed in my Nanyang column "波动中乘风破浪" (Riding the Waves of Volatility), traders who had put warrant hedges in place were able to:
- Offset 30-50% of their stock losses through put warrant gains
- Stay invested and participate in the rapid recovery that followed
- Even profit from the event by having sized their hedges correctly
Those without hedges panicked, sold at the bottom, and missed the recovery. The difference between the two groups? A small upfront investment in put warrants.
Frequently Asked Questions
What are put warrants and how do they work for hedging?
Put warrants are structured warrants that increase in value when the underlying stock or index falls. By buying put warrants on stocks you own, you offset portfolio losses during market downturns. They act as portfolio "insurance."
How much of my portfolio should I hedge?
Warren Mak recommends even a 30-50% hedge can significantly reduce portfolio volatility. The exact amount depends on your risk tolerance, market outlook, and the cost of the put warrant premium.
Can I use put warrants to hedge during earnings season?
Yes. Buy put warrants before earnings announcements to protect against negative surprises. If the stock rises, you only lose the small put warrant premium.
What does hedging with put warrants cost?
The cost is the premium paid for the put warrants — typically 2-5% of your portfolio value. This is a fraction of potential losses in an unhedged portfolio during a market crash.
Should I use index puts or stock puts for hedging?
If you hold a diversified portfolio, index put warrants (KLCI or HSI) provide broad protection. For concentrated single-stock positions, individual stock put warrants offer more precise hedging.