1.What to do next time (before you trade) a- read Chris Tembys book on options b- do the free ASX course on warrants greeks c- ask your broker to tell you fair value , or use the asx online calculator
2. the simple answer to your question; a quick look at the charts tells me cba’s vola has indeed fallen, and the 20% drop looks about right, considering you paid too much to buy it. CBA moved up sharply and then failed to make new highs. The mms are a very misunderstood bunch. They rip you off in the spread and then make further profit by trading the underlying with your cash. But they don’t usually rip you off by changing vola falsely on you. You lost out by not understanding the right questions to ask. Ring him back and ask him did he mean the implied vola or the historic vola. He should answer historic. Then ask does he use the 20 day hist vola or the 50 day, or some other number. How DOES he calculate volatility? Find out and post his reply. MMs are happy to tell you this stuff because it encourages you to trade more. If he wont, I can tell you ABNA MMs will tell you, so maybe be careful whos warrants you trade in future.
3. Just for fun, heres my maths. 34.00 call, 30 trading days to expiry, cash rate 4.75%, warrant ratio 5:1
8/8/02- cba price 31.56, 35 trading days to expiry, spread 7.1-7.6 so at 7.1, the buy imp vola is 28.62%, and at 7.6 sell the imp vola is 29.5% 9/8/02- cba price 31.56, 34 trading days to expiry, spread 6.2-6.7 so now to buy, at 6.2 , imp vola is 27.5%, and sell at 6.7, imp vola is 28.37% so the MM is saying vola dropped o/nite by 1.12% buy, and 1.13% on sell. At least he’s consistent. Did h vola fall by 1.125%? I think it did.
4. your whole problem lies in that you couldn’t split the bid and ask. IF you could avge out the 7.1-7.6 and buy at 7.35 on 8/8/02, and then sell at 6.2-6.7= 6.45 , youd lose 12% at fair value (according to my dodgy maths). You paid 7.6 to buy (Im guessing from your notes) and sold at 6.2, a loss of 18%. So your commission for playing the game was 18-12= 6% ( a few years ago, it was 10-20%) That’s how they get you. Try reading "the education of a speculator- by Victor Neiderhoffer" for an understanding of commissions and odds. If you traded ETOs, you could split the bid and ask, and then youd only have to worry about whether your view was correct. There are still many good reasons to trade warrants over etos. Just understand fair value and spreads before you play.
Now you see why " the house can grind through a sack of gold" as they say. Oh to be a market maker. Don’t get mad, get even. Learn how to sell like they do.
