With hundreds of structured warrants listed on Bursa Malaysia at any given time, choosing the right one can be overwhelming. Many beginners simply pick the cheapest warrant or the one with the highest volume — and end up losing money even when their market view was correct.
After 32+ years in the securities and derivatives industry — and having written a 10-part series on structured warrants in my Nanyang Siang Pau column — I've distilled warrant selection into 7 key criteria that every Malaysian trader should evaluate before entering a trade.
Why Most Traders Pick the Wrong Structured Warrants
The #1 mistake I see is traders choosing warrants based on price alone. A warrant priced at 1 sen might seem like a bargain, but it could be deep out-of-the-money with only 2 weeks to expiry — virtually guaranteed to expire worthless.
"Avoid thinly-traded structured warrants. They trade rarely for a reason — they are not good choices among all warrants. When comparing warrant activity, compare by trading value (volume x average price), not just volume." — Warren Mak, Nanyang Siang Pau
The second mistake is ignoring the role of the market maker. Understanding how market makers operate is crucial for successful warrant trading.
7 Key Criteria for Choosing the Best Structured Warrants
Criterion 1: Liquidity and Trading Volume
This is the single most important criterion. An illiquid warrant can trap you — even if your market view is correct, you may not be able to exit at a reasonable price.
How to measure liquidity correctly:
- Compare by trading value (volume x average price), NOT volume alone
- A warrant trading 50 million units at 0.5 sen (RM250,000 value) is less liquid than one trading 5 million units at 15 sen (RM750,000 value)
- Check the bid-ask spread — tighter spreads indicate better market maker support
- Look at the queue depth — how many units are available at the bid and ask prices
Criterion 2: Implied Volatility
Implied volatility (IV) represents the market's expectation of future price movement in the underlying asset. It directly affects warrant pricing:
- High IV = More expensive warrants (higher premiums). Good if you already own the warrant, bad if you're buying
- Low IV = Cheaper warrants. Potentially good buying opportunities if you expect volatility to increase
- Compare IV across warrants on the same underlying asset. A warrant with significantly higher IV than similar warrants may be overpriced
- Be cautious of buying warrants during IV spikes (e.g., during panic selling) — IV often contracts afterward, reducing warrant prices even if the underlying moves in your direction
Criterion 3: Effective Gearing
Effective gearing tells you the expected percentage change in the warrant price for a 1% move in the underlying asset. For example:
- 5x effective gearing = warrant moves ~5% for every 1% move in the underlying
- Higher gearing means higher potential returns — but also higher potential losses
- Important: Use effective gearing, not simple gearing. Simple gearing only considers the price ratio and ignores delta — it can be very misleading
- For beginners, warrants with 3-6x effective gearing offer a good balance of leverage and risk
Criterion 4: Time to Expiry
Time decay (theta) is the silent killer of structured warrant profits. Every day you hold a warrant, it loses time value — and this decay accelerates dramatically as expiry approaches.
- Minimum 2-3 months to expiry for most trading strategies
- Avoid warrants with less than 30 days to expiry unless you have a very specific, near-term thesis. Time decay in the final month can be devastating
- Longer-dated warrants (4-6 months) give you more time for your thesis to play out, but they cost more due to higher time value
- Balance time to expiry with your expected holding period — don't buy a 6-month warrant if you plan to day-trade
Criterion 5: Moneyness (ITM, ATM, OTM)
The relationship between the underlying asset price and the warrant's strike price determines "moneyness":
| Moneyness | Call Warrant | Characteristics |
|---|---|---|
| In-the-Money (ITM) | Share price > Strike price | Most expensive, lowest gearing, highest delta, least likely to expire worthless |
| At-the-Money (ATM) | Share price ≈ Strike price | Moderate cost, moderate gearing, balanced risk-reward |
| Out-of-the-Money (OTM) | Share price < Strike price | Cheapest, highest gearing, lowest delta, most likely to expire worthless |
My recommendation: For most traders, at-the-money or slightly in-the-money warrants offer the best balance of cost and probability of profit. Deep OTM warrants look cheap but have a very low probability of paying off.
Criterion 6: Issuer and Market Maker Quality
The issuer's market-making quality directly affects your trading experience. Key factors:
- Spread tightness: Better market makers maintain tighter bid-ask spreads, reducing your entry/exit costs
- Quote responsiveness: How quickly the market maker updates prices when the underlying moves
- Price matrix availability: Currently, only Macquarie and Kenanga provide price matrices out of the 6 issuers in Malaysia. A price matrix shows you the expected warrant price at different underlying prices and dates — invaluable for trade planning
- Consistency: Some market makers withdraw quotes during volatile periods. Better issuers maintain quotes even in difficult markets
Criterion 7: Bid-Ask Spread
The bid-ask spread is the difference between the buying price (ask) and selling price (bid). This is a direct cost to you:
- Tight spread (0.5-1 sen): Good — lower transaction cost, easier to profit
- Wide spread (2-5+ sen): Bad — you're already at a loss the moment you buy. Need a larger move just to break even
- Calculate the spread as a percentage of the warrant price. A 1-sen spread on a 5-sen warrant (20%) is much worse than a 1-sen spread on a 50-sen warrant (2%)
Understanding How Market Makers Work
A common misconception is that market makers trade warrants based on their views of the underlying stock. This is wrong.
"Structured warrant and ETF market makers buy and sell stocks based on their market-making requirements from trading volumes, not based on their views of the underlying stock." — Warren Mak, Nanyang Siang Pau
Market makers are hedging machines. When you buy call warrants, the market maker hedges by buying the underlying shares (delta hedging). When you sell, they sell shares. Their profit comes from the bid-ask spread and management of the Greeks — not from taking directional bets against you.
This means high warrant trading volumes can actually move the underlying stock price as market makers execute their hedging trades. Understanding this dynamic gives you an edge in reading market activity.
Using Put Warrants for Portfolio Hedging
One of the most powerful applications of structured warrants is hedging. If you own a portfolio of Malaysian stocks and are worried about a market correction, buying put warrants acts like insurance:
- If the market drops, your put warrants gain value, offsetting losses in your stock portfolio
- If the market continues rising, you lose only the small premium paid for the put warrants — a small "insurance cost"
- For HSI exposure, the best hedging tool for HSI call warrants is HSI put warrants
The key is sizing your hedge appropriately. A full hedge (100% offset) is expensive. Most traders hedge 30-50% of their portfolio exposure using puts, accepting some downside in exchange for lower hedging costs.
Tools to Help You Choose Warrants
- Issuer websites: Macquarie Warrants (malaysiawarrants.com.my) and Kenanga provide warrant calculators and price matrices
- Bursa Malaysia: The official Bursa Marketplace has a warrant screener with filters for underlying, expiry, and moneyness
- Trade Wizard: Malaysia's first Bursa-licensed AI platform — offers AI-powered warrant analytics and screening tools
- Your broker's platform: Most platforms have built-in warrant screeners and comparison tools
Quick Warrant Selection Checklist
- Is the underlying asset trending in my expected direction? (Confirmed market view)
- Is the warrant liquid? (Check trading value, not just volume)
- Is implied volatility reasonable? (Not at extreme highs)
- Is effective gearing appropriate for my risk tolerance? (3-8x for most traders)
- Does it have enough time to expiry? (At least 2-3 months)
- Is it at or near the money? (Avoid deep OTM warrants)
- Is the bid-ask spread tight? (Under 5% of warrant price)
Frequently Asked Questions
What is the most important factor when choosing structured warrants?
Liquidity is the most important factor. Choose warrants with high trading value (volume x price) and tight bid-ask spreads. An illiquid warrant can trap you in a losing position because you cannot exit at a reasonable price.
Should I choose in-the-money or out-of-the-money warrants?
For most traders, at-the-money or slightly in-the-money warrants offer the best balance. ITM warrants are safer but more expensive. OTM warrants are cheap but have a high probability of expiring worthless. ATM warrants balance cost and sensitivity.
How do I check if a structured warrant has good liquidity?
Compare by trading VALUE (volume x average price), not just volume. Also check the bid-ask spread — tighter spreads mean better market maker support and lower transaction costs for you.
Which warrant issuers provide price matrices?
Currently, Macquarie and Kenanga are the two issuers in Malaysia that provide price matrices. These tools show expected warrant prices at different underlying prices and dates — invaluable for planning your trades.
How many days to expiry should a structured warrant have?
Choose warrants with at least 2-3 months to expiry. Avoid warrants with less than 30 days to expiry unless you have a very specific short-term thesis, as time decay accelerates sharply in the final month.