Options Strategy: Suncorp-Metway (SUN)

Posted on March 29th, 2010 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

Sold Strangle

Posted on March 22nd, 2010 admin No Comments

The sold strangle is the converse of the long strangle. The call and put options are sold instead of bought. The investor loses if the underlying security increases or decreases enough; but if the stock price remains stable then the options expire and the investor gets to keep the premiums.

To receive ASX Option Recommendations or to learn more about straddles and strangles please request the complete Straddles and Strangles eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Put Spread: The Strategy

Posted on March 11th, 2010 admin No Comments

A bull put spread is a moderately bullish option strategy that profits when the underlying share price stays still or increases. A bull put spread is similar to a bull call spread. The bull put spread involves simultaneously selling of a put option at a strike price while also buying the same number of put options of the same asset but at a lower strike. A bull put spread is also a technique to selling naked puts but buying lower puts to reduce the maximum loss. Because the bull put spread is a credit spread, you also make money if the underlying asset does not move through time decay. The bull call spread, on the other hand, would not be able to profit if the stock did not move upward beyond its breakeven point.

Maximum Profit

To achieve maximum profit the share price must be above the sold put strike price at expiry. The maximum profit for a bull put spread is the net credit received.

Maximum Loss

If the stock price decreases below the bought put at the expiration date, then the investor has a maximum loss. The maximum loss is the difference between the sold put and bought put strike price less the net credit received.

Break Even

The breakeven is higher than just selling a put; however the maximum loss is reduced significantly. The break even point is the strike price of the sold put minus the net credit received.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Call Spread: Advantages and Disadvantages

Posted on March 8th, 2010 admin No Comments

Advantages of Bear Call Spread

  • Loss is limited if the underlying financial instrument rises instead of falls.
  • If the underlying instrument fails to drop below the strike price of the out-of-the -money sold call option, the profit yield will be greater than just buying put options.
  • Able to profit even when the underlying asset remains completely still.
  • Lower risk than simply writing naked call options as maximum downside is limited by the bought call option.

Disadvantages of Bear Call Spread

  • There will be no more profits possible if the share price drops beyond the strike price of the sold call option.
  • Because it is a credit spread, there is a margin requirement in order to put on the position.
  • As long as the short call options remain in-the-money, there is a possibility of it being assigned. You may then have to purchase the underlying stock to meet the sold call obligation.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Put Spread: Woolworths Limited (WOW) Past Recommendation

Posted on March 8th, 2010 admin No Comments

This is a past recommendation that demonstrates how a bear put spread is implemented in real life.

Trade:

Bear Put Spread

Sell 2 WOWB7 Sep 08 2200 Puts @ 55

Buy 2 WOWW3 Sep 08 2550 Puts @ 175

Net Cost = 120 cents

This trade requires no margin requirements.

Maximum Profit

The ideal result is for the share price to fall below the lower strike price of $22.00.

= Difference between strike prices less net premium received

= 3.50 – 1.20

= 2.30 x 2 contracts

= $4,600

Maximum Loss

This will occur if the share price is above the bought at expiry

= Net Premium Paid

= 1.20 * 2 contracts

= $2,400

Breakeven

Higher strike minus net premium received

= 25.50 – 1.20

= $24.30

Main Benefits of Strategy

1. Provides leveraged exposure to a decrease in the share price

2. The ideal result is for the share price to fall below the lower strike price of $22.00.

Risk:

The main risk is for the share price to increase above profitable range ($25.50) and stay there until expiry. If the position expires above the high strike, the position will expire worthless and there will be no exit cost to the trade. If it is below, we will have to exit the trade to avoid being exercised. A change in volatility levels can also have an effect on the profitability before expiry, however the max loss and profit is known at expiry. Contact your adviser for more information.

Technical Analysis

WOW has a large bearish head and shoulders pattern which has taken about a year and a half to develop. These patterns are usually very reliable and the stock has broken below the neck line this morning. The head and shoulders give a price target of $17.00. We are trading a bear put spread out to September which will return around 200% if the stock falls to $22.00 which is realistic considering the price target for this pattern is $17.00. The September position gives just over 3 months for the stock to fall. Due to the break today, the volatility on the out of the money puts options are very high, so this trade is actually been filled for below fair value which of course is in our favour.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Put Spread: Advantages vs. Disadvantages

Posted on March 2nd, 2010 admin No Comments

Advantages of Bear Put Spread

  • The loss is limited if the share price rises instead of fall.
  • If the share price fails to fall beyond the strike price of the out-of-the-money sold put option, the profit yield will be greater than just buying put options.
  • It is also a way of buying put options at a discount by selling the out of the money put option at a strike price beyond that which the underlying asset is expected to fall.
  • The breakeven on the bear put spread is higher than just buying a put.

Disadvantages of Bear Put Spread

  • There will be no more profits possible if the share price falls beyond the strike price of the out-of-the-money put option so profit is limited.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bear Put Spread: The Strategy

Posted on March 1st, 2010 admin No Comments

A bear put spread is a moderately bearish option strategy that profits when the underlying share price falls. A bear put spread is the reverse of a bull call spread and works the same way but profits from a fall in the share price rather than an increase in share price. The bear put spread involves simultaneously buying a put option at a strike price while also selling the same number of put options of the same stock but at a lower strike. A bear put spread is also a technique to buy put options at a discount. Because you sell an out-of-the-money put option in this option strategy, it effectively reduces your investment on your bought put options. This reduces upfront payment and therefore the risk of the position.

Maximum Profit

Maximum profit is achieved when the share price falls below the sold put at expiry. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options.

Maximum Loss

If the stock price increases above the bought put at the expiration date, then the investor has a maximum loss potential of the net debit. The net debit is the premium received for selling the out-of-the-money put minus the cost associated to purchase the put option.

Break Even

The breakeven is higher than just buying a put which means the share does not have to fall as far. The breakeven point is the strike price of the bought put minus the net debit paid.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

What is an Option Spread?

Posted on February 23rd, 2010 admin No Comments

An option spread trade is created with the simultaneous buying and selling of options of the same underlying share but with varying strike prices. Option spreads can have a bullish or bearish outlook and can be created by either call options or put options. Therefore it is possible to set up a bull spread using calls or puts and a bear spread using calls or puts. It is important to understand the four strategies and when to implement these strategies. The four option spreads are Bull Call Spread, Bull Put Spread, Bear Call Spread, and Bear Put Spread.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Introduction to Option Trading: Combination Trades

Posted on February 22nd, 2010 admin No Comments

Introduction to Option Trading

These basic option positions when combined create option combination orders. These can be created via buying and selling options either put options or call options. Each of the following seminars and e-books will cover one combination strategy in more detail.

Summary

When buying options look to take advantage of their leveraged nature to allow large return with small capital outlay. When selling options look to sell when volatility is high and expected to decrease to help use time decay in your favour.

The information in this e-book is designed so the following Total Option Education Webinars and eBooks will build on this knowledge. The strategies in this book are used by traders everyday however they are normally used together to try and mitigate risks like time decay and volatility.


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 07 5504 2244 or info@totaloptions.com.au

Selection Criteria – Buying Options

Posted on February 22nd, 2010 admin No Comments

When buying call options and put options it is critical to have good timing. When buying call options you don’t only need the stock to increase in value you need it to do so before the time decay in the option starts to affect the option value. Selecting the entry point (timing) of the trade can be assisted through technical and fundamental analysis. You can use technical analysis to identify break-out patterns to trade through buying calls or puts. It is important to make sure you buy enough time for expected movements. Also to make sure you buy your option at a reasonable price, you must analyse the volatility and make sure you are buying when volatility is low and expected to increase. Always make sure the option has enough open interest so liquidity is not an issue. If you stick to the blue chips this should not be an issue. Buying out-of-the-money calls is higher risk but potentially has large percentage returns. However, buying at-the-money calls has a higher delta but costs more so percentage returns are smaller.


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 07 5504 2244 or info@totaloptions.com.au