How to Short Sell Thai Shares

Short selling is a way that you can make money when prices on the Stock Exchange of Thailand (SET) are falling. In this article I review two different strategies that you can use to short sell specific Thai shares. I also explain why I prefer one of these strategies over the other.

Strategy One: Short Selling with Thai Single Stock Futures

A single stock future (SSF) is a contract between two traders to exchange a quantity of shares in a Thai listed company, at an agreed price, and with the delivery of those shares occurring on a specified date in the future. SSF contracts are traded on the Thailand Futures Exchange (TFEX).

A trader agreeing to take delivery of the underlying shares in the future hopes or expects that the market price will rise. He or she is referred to as the buyer of the contract and is said to have opened a long position. A trader agreeing to provide delivery of the shares in the future hopes or expects that the market price will fall. He or she is referred to as the seller of the contract and is said to have opened a short position.

How to Trade SSF

If you are bearish on a particular Thai share, you can open a short position on its SSF. At present, the TFEX offers SSF for 69 companies listed on the SET. Click here to download a list.

You can trade a Thai SSF online, but before you start your Thai broker will require that you deposit what is referred to as an initial margin into your account. The required amount of this initial margin can differ but typically it is between 10-20% of the price of your SSF contract. Because SSF are purchased on margin they are referred to as a leveraged instrument. That is, you can magnify your profits because less capital is required to control the underlying share. But leverage works both ways, it can also magnify your losses.

Your Thai broker will calculate the profit or loss on your SSF position at the end of each trading day and then add or subtract funds from your account. If you have made a profit you can withdraw it leaving just the required initial margin. If you have made a loss however, your account balance may drop down to what is referred to as the maintenance margin. This is the point where your broker will make a margin call and request that you deposit addition funds into your account to top it back up to the initial margin level.

Thai Shares Single Stock Futures Margins

If you create a short position using SSF you must take care to note that your potential losses are unlimited. If the market price of the underlying share continues to rise, your losses are not limited to your initial investment amount, and you will continue to receive margin calls from your broker.

Strategy Two: Short selling with Thai Put Warrants

A put warrant is a derivative financial instrument that gives the holder the right (but not the obligation) to sell an underlying share at a certain price on or before a specific date in the future. Thai put warrants are usually issued by a broker and may only be made available for purchase by its own clients.

The two key features of a put warrant are its expiry date and its exercise price:

Expiry Date: The term expiry date can have a different meaning depending on the exercise style of the warrant. There are two common styles: American, were the warrant can be executed on or before the expiry date, and European, where the warrant can only be executed on its date of expiration. Both of these styles are used in Thailand.

Exercise Price: The exercise price is the amount per share that the holder of a put warrant is assured to receive when the warrant is executed.

Like single stock futures, put warrants are also referred to as a leveraged instrument. This is because they too provide an investor with a way to control a larger amount of shares using less capital then if he or she purchased those shares directly. An important difference between SSF and put warrants however, is that the losses one can sustain on a put warrant are limited to your initial investment. Unlike SSF, put warrants are not subject to margin calls.

A Thai put warrant may be referred to as In The Money (ITM) or Out of the Money (OTM). A put warrant is ITM when its exercise price is higher than the current market price of the underlying share. Conversely, a put warrant is OTM when the exercise price is lower than the current market value of the underlying share.

The primary risk arising from a put warrant is the fact that it has a shelf life. Its market price can fall to zero if there is no expectation that it will be ITM prior to its expiry date.

How to Trade Put Warrants

Thai put warrants are listed on the SET and trade alongside their underlying shares. If you are bearish on a particular Thai share you can do a search using your online trading platform and find a corresponding put warrant.

Have a look at the two screenshots below. They display the live data of a company trading on the SET called Beauty Community (BEAUTY). You can see from these images that this share has recently been doing quite well. Its market price is up 7.57% for the day and 17.75% for the month.

Thai Shares BEAUTY Yield 141016

Thai Shares BEAUTY Price 141016

Now have a look at the two screenshot below. They display the live data of a put warrant for BEAUTY. Its stock code is BEAU01P1701A. You can see from these images that as the share price of BEAUTY goes up the price of its put warrant goes down. The percentage drop is also magnified because, as I mentioned above, a warrant is a leveraged instrument. The market price of the share is up 7.57% for the day and the market price of its put warrant is down 19.67%. But the converse also applies, if the price of BEAUTY goes down, the price of BEAU01P1701A will go up, and the percentage gain will also be magnified.

Thai Shares BEAUTY Put Warrant Details 141016

Thai Shares BEAUTY Put Warrant Price 141016

Let’s imagine that you have been closely watching BEAUTY and had formed the view that the current rally in its price is not sustainable. To create a short position you could commence buying BEAU01P1701A. You can place your buy order online using your Thai trading platform in exactly the same manner that you would use to buy a share. The only difference is that, when buying or selling warrants the minimum required order size is 1000.

Some Things To Consider Before You Pull The Trigger

Here are some things that you should always check before you pull the trigger on a put warrant buy order:

Intrinsic Value: A key factor influencing the market price of a warrant, intrinsic value is always greater than or equal to zero and represents the difference between the exercise price and the current market price of the underlying share. It is important that you check the intrisic value of a warrant so that you have a reference point upon which you can base your opinion of what you should pay for it. You can see from the images above that BEAU01P1701A is currently ITM and has an intrinsic value of .29 Baht (or 29 Satang).

Something worth noting here is that there is a difference between the intrinsic value of the warrant (.29 Baht) and its current market price (it last traded at .49 Baht). That is, the warrant is trading at a premium of .20 Baht on top of its intrinsic value. I like to refer to this premium as the time value of a warrant. Traders are paying an extra .20 to buy BEAU01P170A because its expiry date is 106 days into the future. That is, there is perceived value in the fact that there is more than three months remaining during which the share price of BEAUTY could head south.

Last Day to Trade: I have already warned you about this but it is worth mentioning twice. Make sure that you are crystal clear regarding the expiry date of any warrant that you buy and the last day upon which you can trade it. Remember, if your warrant is OTM on that last day of trading, you will lose all of your money.

Liquidity: Always check the bid-offer spread and history of intraday trading volumes. If you buy a warrant that is thinly traded it may become difficult, or impossible to sell. Moreover, market price of a thinly traded warrant can gap down dramatically leading to significant losses even if you are using a trailing stop.

Why I Prefer Using Put Warrants

If I want to short sell a specific Thai share I prefer to create my position using put warrants and not single stock futures. Here are my reasons why:

I’m Afraid of Sharks: Thai futures are a small and sophisticated investment niche occupied by very savvy traders. If you make a mistake trading futures you get eaten alive. In contrast, Thai put warrants are listed on main board of the SET, a trading environment that is more forgiving than the TFEX because of the presence of domestic mom and pop investors.

I Don’t Like Margin Calls: The maximum that you can lose on a put warrant is limited to the amount of your initial purchase. The price of your warrant can go to zero and that’s it. You should, of course, be using a trailing stop to prevent that from occurring.

Warrants Are More Liquid: Thai single stock futures are a niche that is thinly traded. Put warrants on the other hand are listed on the SET alongside regular shares. The trading volume on some warrants can be low, especially if an expiry date is looming, but on the whole there is usually sufficient volume to facilitate active trading.

I Only Have To Watch One Market: When I become interested in short selling a Thai Share I put its stock code in my watch list (BEAUTY) along with the code for its put warrant (BEAU01P1701A), and the code for its call warrant (BEAU01C1701A). I can then watch the price and trading volume correlations between the underlying share and its derivative warrants as displayed in the image below (click to view a larger version).

Thai Shares BEAUTY Call Warrant Watchlist 141016

My brain hurts less if I create a short position using put warrants because I only have to keep an eye on one market, the SET. If I create a short position using futures, I have to watch both the SET (where the underlying share is trading) and the TFEX (where the SSF is trading).

Because I have mentioned BEAU01C1701A above, it is prudent here that I explain that, in simple terms, a call warrant is the mirror reverse of a put warrant. When the price of a share goes up, so too does the price of its call warrant. I have not sought to discuss call warrants in detail in this article. If you want to learn more about them please read my other article called: 360% Profit in 4 Months Trading a Warrant.

Skim trading with warrants

Thai warrants (both put and call) are my go to choice when I want to trade frequently and skim small profits. It is an area of the Thai market where I always find consistent opportunities to trade. And, because of the leveraged nature of warrants, opportunities to trade continue to appear even when the SET is tracking sideways and share prices are channeling within a tight range. A price swing of just a few ticks on an underlying share can still provide me with a healthy percentage gain to skim off its warrant.

I can also skim the smallest of margins if need be because my Thai broker does not have fixed or minimum fees. I am charged just 0.15% of the value of my trade. I can therefore move in and out of multiple intra day warrant positions without having the modest profits that I skim eaten away by brokerage.

There are a few other features of my Thai brokerage account also worth mentioning. First, the Thai government does not levy any tax on the capital gains I make trading on the SET. Secondly, I don’t have to be in Thailand to trade the SET online. I can trade from anywhere in the world as long as I have access to a computer (or phone) and an internet connection. Thirdly, my Thai broker also pays me 1.5% p.a. interest on the balance of any funds in my trading account.

Your comments or feedback on this article are welcomed. If you are currently skim trading cheap stocks on American markets, it is my opinion that you are much better off to stop what you are doing and focus your efforts instead on trading Thai shares and warrants. The arguments upon which I base that opinion are listed in detail in my article called: Trade Thai Shares Not American Penny Stocks.