By Goh Eng Yeow

TRADING in bank warrants has proved lucrative for investors who were willing to wade into a market largely stagnated due to jitters.

Most investors have sought the safety of the sidelines amid regional market turbulence following worries over troubled US mortgage lenders Fannie Mae and Freddie Mac.

But traders who bought covered warrants on banks as they suffered a knee-jerk sell-down last week would have enjoyed a tidy profit, given their rapid recovery.

Even before better-than-expected results from US banks set Wall Street on the road to recovery, bargain-hunting in local bank shares was already under way, after they said that their exposure to Fannie Mae and Freddie Mac was 'not material'.

Buying warrants gives a trader an option to buy into a bank stock without forking out for the pricey stock.

As the warrant tracks the mother share closely, a small change in the share price will result in a bigger percentage change in the warrant price.

Among the most heavily traded warrants yesterday was a call issued on DBS Group Holdings by Deutsche Bank (DB), which rose 2 per cent to 25.5 cents on a volume of 8.47 million units.

This was despite the mother share closing two cents, or 0.1 per cent, down at $19.16, after hitting an intra-day high of $19.22.

With the DB contract, a trader has the option to buy one DBS share at $18.50 by using six warrants.

Those who believe that another correction is imminent can 'short-sell' bank stocks by buying a put warrant.

This works in exactly the opposite way to a call by giving a trader the option to sell a stock at a pre-determined price.

Among the puts on DBS is a contract issued by DB giving its holder the right to sell the bank stock at $19.50 using six warrants.

One trader, however, believed that the fortunes of banks will hinge largely on the outlook they provide to investors when they release their second-quarter results in the coming weeks.

'Analysts would be scrutinising their balance sheets carefully to see if they are tainted by the US sub-prime crisis,' he added.

This article was first published in The Straits Times on 23 July 2008.