Trading Strategies With The Chinese Covereds

This is for readers who have been following, investing, punting and trading in the Chinese covered warrants for at least the last 3 months. These are not hard and fast rules, but guidelines:

a) If you haven't participated at all in H-shares or their covered warrants, to chase on "up days" would give you a lot more risks than the inherent rewards. If you haven't participated before, you may still go in but you have to time your entry levels - there will be down days, it won't be a straight line to 10,000 that's for sure. The excitement brings about a lot of volatility in these warrants now, so timing entry levels are crucial.

b) If you followed the advice of holding till maturity, you should keep at it because even if the market there corrects, you have ample room and ample time to jump off ship. So, its better to ride the trend till expiry. If things look shaky and you wish to take some profit, go ahead but don't put those chips back at higher levels.

c) Its more of a trading market over the last couple of days. The nature of the beast has changed. When investors were buying Petrochina warrants at 15 or 20 sen, it took forever to move but you are buying for the unfolding of the catalysts, now the catalysts are unfolding, hence you are supposed to reap the full benefit, do not shortchange yourself.

d) As one fellow blogger (Seng) would say, you can reduce your average cost on rising covereds such as Shenhua, Petro or CNOOC - you can use guidelines such as everytime it rises 50% from your cost level, you take 25% off the table, and so on. That's because we never know when the peak is, especially when it goes up in such a huge quantum over such a short period. There may be chances to re-enter at much lower levels.

e) Everything being equal, I don't see a major correction, any correction will be due to external factors which is beyond our grasp. The domestic liquidity situation and the insulated nature of the Chinese financial markets looks likely to sustain a strong market. The unfolding of the migration of H-shares to Shanghai is also supporting sentiment. Things that could rattle the Chinese markets will be fiscal in nature: rise in stamp duty, capital gains tax ...

e) The latest news has it that China is studying a plan to allow arbitrage in shares of companies traded on domestic and Hong Kong exchanges, said Tu Guangshao, vice chairman of the China Securities Regulatory Commission said in Beijing. This development give a boost to the Hong Kong market and H-shares in particular, and at the same time take some steam out of A-shares in Shanghai and Shenzhen. This plan should be a reality soon as it would help stem the rise in Shanghai & Shenzhen markets, without a major correction - something the administrators would really wish to see leading up till the Olympics. Tu's remarks came after the Hong Kong exchange closed.

As most of the international covered warrants on the Bursa are H-shares, this would further spike them up. How much good news do you need?