Options Strategy: Suncorp-Metway (SUN)

Posted on admin No Comments

The following options trade on SUN take advantage a buy recommendation and a short-term price target of $10.50. The volatility is high after there on the SUN put options and low on the SUN calls meaning a protected long synthetic is a great strategy to take advantage of these volatility levels.

The options strategy has limited risk, and will make money as soon as the share price increases so the position can be closed out at any time for a profit once the share price increases. The trade has limited risk and unlimited return. The greater the share price increases, the higher the profit. Once the stock has moved there could be opportunities to sell short dated options against the position to further increase the return.

The call position expires in April, so there is time for the stock to increase. The trade involves buying a long dated call for June which expires in 6 months to take advantage of the share price increasing. To pay for this we are selling a bull put spread out until June to pay for the call option. The whole trade is actually done for an approximate 18 cent credit or $180.

The trade details are below as well as some more information on the reasons for entering this trade.

Trade:

* Buy 2 contracts April 2010 $8.33 Puts 26 cents

* Sell 2 contracts April 2010 $8.82 Puts 47 cents

* Buy 1 contracts April 2010 $9.31 Calls 24 cents

Net credit: 18 cents

Net credit: $180

Summary:

Maximum Profit: Unlimited

Profit if above $8.82 and below $9.31 = $180 or Return on Risk of 22.5%

Maximum Loss is below $8.33 = $800

Breakeven = $8.64

Primary Profit Target $10.50 = $1,600

Return on Risk = 200%

Secondary Profit Target $12.00 = $2,900

Return on Risk = 362.5%

Margin requirement: This trade is done for a credit of $180; however a margin is required for the bull put spread. The margin requirement will increase if the stock falls, and reduce if the stock increases. After the market increases the bull put spread if cheap enough will be closed out for a profit and then there would be no margin requirement. Allow approximately the maximum risk in dollars to cover the margin requirement or clients with share portfolios can use the shares as collateral. Initially the margin will not be that high, but it’s important to have it available if needed.

If you would like to place this trade please email me your account number and quantity of contracts to trade otherwise I can be contacted by email or on 1300 736 622 for more information.

Trade Summary:

* Fundamentals of SUN are strong after announcing an increase in First Half Net Profit of 41% this morning.

* Volatility is high on the put options and low on the call options so we are selling the high volatility and buying the low volatility to take advantage of this short-term volatility spike.

* A primary Profit Target exists at $10.50. This trade has unlimited return; however around the $10.50 level the trade would be up approximately $1,600 (100% return on risk + a higher return on the funds invested) for the above recommendation.

* A secondary Profit Target exists at $12.00. This trade has unlimited return; however around the $12.00 level the trade would be up approximately $2,900 (181.25% return on risk + a higher return on the funds invested) for the above recommendation.

* Notice on the chart below that SUN is still in a very strong uptrend.

* This trade has limited risk and unlimited return and provides leverages exposure to SUN break out above the recent highs of $9.40.

* The position can be closed out at any time once the share price has increased. This trade does not have a neutral trade and therefore does not need to be held until expiry to achieve maximum profit.

* On the monthly chart it shows a bull flag which is an explosive breakout pattern which would help SUN reach its targets in the short-term.

The Strategy – Protected Long Synthetic:

The Protected Long Synthetic is a strategy designed to have a leveraged exposure to a stock while only committing a small amount of capital. The strategy is designed to have a bullish view on a stock and to determine the maximum risk when entering and having unlimited potential return. This strategy is implemented when a stock looks set for a breakout or a strong share price increase. The bull put spread is entered for a credit and the funds received on this trade are used to buy call options. Buy selling the put options it reduces the negative time decay on the call options. The strategy also allows a profit to be made straight away and the trade can be closed out early with a profit and does not need to be held until expiry.

For more information on this strategy or to implement a Protected Long Synthetic Portfolio on a number of stocks please contact me to discuss in more detail.

Fundamental Analysis:

This morning Suncorp announced their First Half Results. The market has reacted negatively due to a reduction of the dividend from 20 cents last year to 15 cents. The net profit for the six months to Dec. 31 rose 41% on year to A$364 million from A$258 million a year earlier. So I believe the fall in Suncorp today is an overreaction and recommend buying the stock and the placing this trade.

The result was in the middle of its guidance range, issued earlier this month, for a net profit of A$355 million-A$375 million. The improved result reflected a strong contribution from the group’s general insurance operations, which benefited from favorable weather conditions and improved equity markets during the half. But its banking arm weighed down the result, recording a A$4 million profit for the half. Chief Executive Patrick Snowball, who took up the top role on Sept. 1, said in a statement that while the increased profit was pleasing, the group will maintain a cautious and conservative approach. Brisbane-based Suncorp declared an interim dividend of 15 cents a share, down from to 20 cents last year, which is slightly below its target payout ratio of 50%-60% of earnings.

Weekly Chart:

Monthly Chart:

Payoff Diagram:

To receive ASX Option Recommendations or to learn more about trading options please contact us on 1300 368 316 or info@totaloptions.com.au

US Option Recommendation – The Mosaic Company (MOS) Protected Long Synthetic

Posted on admin No Comments

I am looking to place the following option trade on The Mosaic Company (MOS:xnys) which trades on the New York Stock Exchange to take advantage of an increase in the share price. The option strategy has limited risk, and will make money as soon as the share price increases so the position can be closed out at any time for a profit once the share price increases. The trade has limited risk and unlimited return. The greater the share price increases, the higher the profit. Once the stock has moved there could be opportunities to sell short dated options against the position to further increase the return. The bought call position expires in June, so there is plenty of time for the stock to increase. The trade involves buying a long dated call for June which expires in 6 months to take advantage of the share price increasing. To pay for this we are selling a bull put spread out until June to pay for the call option. The whole trade is actually done for an approximate 205 cent credit or $1230. The trade details are below as well as some more information on the reasons for entering this trade.

Trade:

Sell 6 contracts June 2010 $60.00 Puts 700 cents

Buy 6 contracts June 2010 $50.00 Puts 300 cents

Buy 3 contracts June 2010 $65.00 Calls 390 cents

Net credit: 205 cents

Net credit: $1230

Summary:

Maximum Profit: Unlimited

Profit if above $60.00 and below $65.00 = $1,230

Maximum Loss is below $2.50 = $4,770

Breakeven = $57.95

Primary Profit Target $80.00 = $13,230

Return on Risk = 277.36%

Secondary Profit Target $100 = $25,230

Return on Risk = 528.93%

Margin requirement:

This trade is done for a credit of $1230; however a margin is required for the bull put spread. The margin requirement will increase if the stock falls, and reduce if the stock increases. After the market increases the bull put spread if cheap enough will be closed out for a profit and then there would be no margin requirement. Allow approximately the maximum risk in dollars to cover the margin requirement or clients with share portfolios can use the shares as collateral. Initially the margin will not be that high, but it’s important to have it available if needed.

Fundamental Analysis:

The Mosaic Company engages in the production and marketing of concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. The company produces phosphate crop nutrients for use in crop nutrients and feed phosphate for animal feed ingredients. It also produces and sells potash for use as fertilizers and animal feed ingredients, as well as in industrial applications. Potash is also used for de-icing and as a water softener regenerant. In addition, The Mosaic Company produces and/or markets phosphate-, potash-, and nitrogen-based crop nutrients and animal feed ingredients, as well as operates sales offices, crop nutrient blending and bagging facilities, port terminals, and warehouses. It sells its products primarily to wholesale distributors, retail chains, cooperatives, independent retailers, and national accounts. The company was founded in 2004 and is headquartered in Plymouth , Minnesota . The Mosaic Company is a subsidiary of Cargill, Incorporated.

The Strategy – Protected Long Synthetic:

The Protected Long Synthetic is a strategy designed to have a leveraged exposure to a stock while only committing a small amount of capital. The strategy is designed to have a bullish view on a stock and to determine the maximum risk when entering and having unlimited potential return. This strategy is implemented when a stock looks set for a breakout or a strong share price increase. The bull put spread is entered for a credit and the funds received on this trade are used to buy call options. Buy selling the put options it reduces the negative time decay on the call options. The strategy also allows a profit to be made straight away and the trade can be closed out early with a profit and does not need to be held until expiry.

US Option Recommendations:

Clients who wish to trade the US market can now set up online accounts to take advantage of Full Service Recommendation or to trade yourself on the US Options Platform. If you are interested in opening an account to trade US options please contact me for more information.

For more information on this strategy or to implement a Protected Long Synthetic Portfolio on a number of stocks please contact me to discuss in more detail. If you would like to place this trade please email me your account number and quantity of contracts to trade otherwise I can be contacted by email or on 1300 736 622 for more information.

Technical Analysis:

  • Mosaic is in a long-term uptrend which has recently held on the last pull back in the market.
  • The weekly stochastic is indicating a strong buy at these levels.
  • Mosaic has very little resistance and has potential to reach its primary target of $80 and secondary target of $100


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au