When the Wuhan virus news recently breakout in mid December, I had a sudden realization that I should take a serious approach to speculate the downward movement of Hang Seng Index to earn some money along the way and to hedge my portfolio. So I decided to start with SGX put warrants with HSI Futures as its underlying. Its time to strike while the iron is hot.
Below are my further considerations before I decided to take a bet on downward movement of Hang Seng Index.
1) Bad news on sustained and prolonged basis
My view is that for Hang Seng index to fall downward for sustained period, there must be a main driving force that drives massive stock sell-off and it must last for a while. I believe that the driving force is the emotional fear within the hearts of most market participants because fear is a strong emotion that has been ingrained in our survivial genes since ancient times, be it the fear of loss or the fear of missing out. For that fear to sustain or spread further, a series of bad news is required.
Recently, scientists had confirmed that the Wuhan virus had 80% genetic makeup similarity as that of SARS and both viruses belonged to the same coronavirus family. I believe this information alone will incite certain degree of fear to general public in mainland China and Hong Kong because of SARS outbreak happened decades ago. To make the fear worst, there is currently no cure or vaccine available for the Wuhan virus.
In addition, when the Wuhan virus outbreak is gaining more attention worldwide it was about 1 week away from Chinese new year where huge human traffic flow is expected. I take the liberty to interpret this that the number of infected cases and death cases will only get worse during and after the Chinese new year. Some Chinese believed if the new year begins in a bad way, it is an omen of bad luck all the way till the end of the year. Indeed, the number of infected cases and death cases reported are consistently rising and Hong Kong recently announced emergency outbreak due to this.
2) Technical analysis - downward momentum
Since I intend to hold my put warrant position for days or longer, I used MACD indicator on Hang Seng index daily chart to confirm the index downward movement momentum. When the Wuhan virus news are getting more attention, the index falls from the recent peak. Subsequently, the MACD (12, 26) blue line crossed below the signal red line and the gap between those lines are widening, as indicated by the red histogram increasing downwards. From here, MACD seems to indicate strong sell signal and strong index downward movement momentum.
However, speculation does comes with risks and so I entered speculative position with small capital. Below are some the risks I can think of.
1) Positive and quick vaccine development progress
Although there is no vacine currently available for Wuhan virus, scientists worldwide are collaborating to develop and test the prototype vaccine. In fact, scientists in Chinese mainland had successfully sequenced and mapped out the virus' entire genome sequence, thereby shortened the time to get the vacine ready to the mass public.
2) Severity of the Wuhan virus
Althought the virus is spreading faster than SARS, the mortality rate is ~ 2-3%, much lower compared to SARS of ~ 10%. Also, as of now the total deaths reported are all came from mainland China and most of them are in their old age with health issues. A number of successful recovery cases have also been reported. As the custom securities and checks are further tightened in countries worldwide, there is a chance that the viral spread could be effectively contained.
I entered put warrant position with HSI futures as underlying at SGD 0.066 on 22nd Dec 2019. It turns out the HSI index agreed with my speculation logic and at the time of this writing, my gain is about 160%. A whopping 160% paper gain in just 9 days is something I can't imagine. However, as warrants and HSI are both volatile, my gains could be wiped out if I am being too greedy. To prevent massive losses to my capital due to unforseen circumstances, I can only speculate with small capital. I will exit position if at least one of the following conditions are met:
1) Put warrant is near expiry
When the warrant is 1 week before expiry, there will be no trading allowed for that warrant. If HSI goes against me during that week, I will be screwed. So, I will liquidate my position if the expiry date is very near to the 1 week period prior to expiry.
2) MACD line crosses above signal line
If the MACD line crosses above the signal line, it means the HSI index upward movement momentum begins. No reason to hold my position when the index is expected to move upwards with strength.
Let the force of the universe guide me along the way in my speculative journey.
***Latest Update***
I liquidated my put warrant position at SGD 0.137 on 04 Feb 2020 even though the MACD line has yet to cross the signal line. This is because the green candle stick on that day was having a gap higher than previous day's candle stick. This indicated that the market participants had optimistic view on that day even though the Wuhan virus infection rate and death rate reported are still increasing. Also, currently I am having a full time job and when I saw my paper gain fall from 160% profit to about 100% profit in just 2 trading days, I was distracted while performing my day-to-day tasks. To ease my mind, I decided I need to pull the trigger to sell the warrant to lock in that 100% gain.
Of course, no one can predict the future and in this case I was lucky my view was correct. 1 day later, the HSI started with another higher gap and had already breached the purple support line. In addition, the MACD histogram showed a decrease in downward movement momentum strength, indicated the existence of the upward movement momentum strength. Both happened when Wuhan virus infection rate and death rate reported are still increasing.
