港股窩輪Jenny

wrote a column ·

Retail investors love stocks priced at $0.02 or $0.03, but how much profit is already eaten up by just one tick spread?

In the derivative warrants market, there’s one type of product that always grabs attention:

Two cents.

Three cents.

At first glance, it just feels like: 'Very cheap.'

If I buy 100,000 units of a warrant priced at HK$0.20, it costs me HK$20,000—but at HK$0.02, it only costs HK$2,000.

And if it moves up one tick, from HK$0.02 to HK$0.021, it seems like a 5% gain already.

So retail investors naturally think:

This kind of product must offer huge leverage, with limited downside risk and the potential for rapid upside.

The first part is sometimes correct.

But the second part isn’t necessarily so.

Let’s start with the simplest calculation.

Assume the product price is HK$0.020.

Bid price is HK$0.020, ask price is HK$0.021.

One tick is only HK$0.001.

It seems very small.

But HK$0.001 divided by HK$0.020 actually equals5%。

In other words, the moment you buy, the bid-ask spread alone already amounts to several percentage points.

If the product price is HK$0.03, one tick of HK$0.001 represents 3.3%.

What if the bid-ask spread for a HK$0.02 warrant isn't one tick, but HK$0.002?

Straight to 10%.

This doesn’t even account for whether the underlying stock moves in your favor, whether implied volatility (IV) changes, or whether time decay occurs.

There are plenty of real-life examples in today’s market.

Some call warrants priced at just a few cents actually saw significant trading volume today.

There’s a Hang Seng Index call warrant priced around HK$0.029 with a bid-ask spread of HK$0.001—representing a spread of about 3.4% alone.

There are Tencent call warrants priced at around HK$0.026, but the bid-ask spread is as wide as HK$0.003, already exceeding 11% on its own.

There are also Alibaba call warrants priced at around HK$0.024, with a similarly wide bid-ask spread of about HK$0.003—equivalent to 12.5%.

If you buy a product priced at HK$0.024 and immediately try to sell it—assuming the theoretical price remains unchanged—the bid-ask spread alone could eat up roughly 10% of your investment.

Can this still be called 'cheap'?

The price is low.

But the transaction cost is anything but low.

Bull and bear certificates can be even more extreme.

Today, some Hang Seng Index bull certificates are priced only between HK$0.014 and HK$0.025.

That looks extremely tempting.

Leverage can even exceed 100x.

For example, some products are priced at around HK$0.014, with leverage exceeding 180x.

Another batch priced between HK$0.015 and HK$0.021 also offers leverage of 120x to 170x.

Seeing this for the first time is truly tempting.

But then look at the knock-in distance.

For some, the distance between the current Hang Seng Index level and the knock-in price is only about 0.1% to 0.4%.

This isn't really 'I'm bullish on the Hang Seng Index.'

It's more like playing a game where:

The Hang Seng Index must move sharply upward immediately, with almost no room for even a minor downward fluctuation in between.

Not to mention that for a HK$0.015 product, a bid-ask spread of HK$0.004 already amounts to approximately 27% of its price.

You think you’ve bought a very cheap bull warrant.

In reality, you’ve bought a short-term lottery ticket with extremely low margin for error and high transaction friction.

Why do retail investors still prefer penny-priced products?

Because we often confuse 'unit price' with 'cheapness.'

A stock priced at HK$100 per share isn’t necessarily expensive.

A stock priced at HK$1 per share isn’t necessarily cheap.

The same applies to derivative warrants.

What you should really look at includes at least:

moneyness (in-the-money or out-of-the-money level), delta, effective gearing, time value, bid-ask spread, implied volatility (IV), trading volume, open interest, and how far you expect the underlying stock to move before the product starts reacting meaningfully.

For callable bull/bear contracts (CBBCs), also add the distance to the call price.

These are the real costs.

HK$0.02 is just a quote.

Be especially cautious of the illusion that 'one tick already yields a large profit.'

Many people say:

A one-tick increase from HK$0.02 is a 5% gain—very easy to trade.

That’s correct.

But don’t forget, a one-tick drop is also 5%.

If the bid-ask spread itself is already one tick wide, the underlying stock must first move an entire tick in your favor just for you to break even.

Moreover, the cheaper the product, the larger the percentage each tick represents of its price.

Therefore, penny-priced products are not actually a 'safer, small-stakes option.'

Often, it's exactly the opposite:

It is a version with even less margin for error.

Next time you see structured warrants priced at HK$0.018, HK$0.022, or HK$0.025, don’t immediately focus on how cheap they appear.

First, grab your calculator and do some quick math:

What percentage does one price tick represent?

What’s the bid-ask spread as a percentage?

How much time decay occurs each day?

How much buffer remains before knock-out?

You might find that the truly most expensive product is often the one that looks cheapest on screen.

46K Views