Monday Australian Options 27 Sep 2010

Presented on SKY Business Channel (602) Monday 10.10am

Sky News Business

1. As TLS made a new all time low of $2.63 on Friday, what are your observations from the options market?

TLS’ share price is at an interesting juncture at the moment, whilst there are a few headwinds facing the stock at the moment – like the risk of not maintaining its dividend and the yet to be finalised NBN deal, at $2.63 a  share there are definitely two camps out there on the stock. There are those who think its cheap whilst others may think a new low is on its way. Let’s see what the options market have to say about the direction of the share price.

Upon preliminary examination of the put /call ratio on Friday it shows an optimistic story, it was at a ratio of 17 times, which means for every put that was traded, there were almost 5.5 more calls traded. If we were to go back three weeks, the story was more telling. Beginning from the week of 6 September, there were heavy volumes of calls traded on TLS leading to it hitting a high of $2.90 during the week, the put/call ratio then was 0.57; the bullish indicator co-incided with the stock rising. Then there was a switch the week after, two weeks ago with the put/call ratio switching to a bearish 1.31 as the stock fell. So, what about the week just past when TLS reached a new low of $2.63? The put/call ratio was a bullish 0.48, more bullish then three weeks ago when the stock was rising. Bottom line, the actions in the options market is suggesting that the stock is searching for its bottom price range and the strength of the bull camp may be outweighing the bear camp.

However, even if all these observations are inaccurate, the strategy of buying call options when a stock is searching for a bottom is a good strategy, as it caps losses to money spent on the call. The popular TLS call last week was the TLS Oct10 $2.65 call which closed at 8.5c.

2. The ASX launched the Australian VIX Index last week. How is it tracking so far?

The new Australian VIX  Index can be found by typing XVI.ASX at the market depth, just like typing in BHP to find its price. This volatility index is derived over the movement of the S&P/ASX 200 Index which is the XJO. It is the weighted average of the implied volatility of calls and puts of stocks that constitute the XJO index. In essence, it is a measure of investor “fear” factor or a sentiment gauge.  The ASX back dated this index and the highest reading of the Australian VIX or the XVI this year was at 34.23 which happened at the depth of the market slide this year when the index dipped to around 4200 late May. The lowest readings are perhaps more relevant to us at the moment. We had low readings twice this year and they were also times when the market was trading close to 5000. The first time was in early January this year when the market reached a high of 4955 on the 11 Jan. The XVI was at 18.87 and second time was on 15 April when the market hit 5000, the XVI was at 17.32. Both these times, the XVI reached mid 15s before climbing back up to those 17/18 levels before the market turned down.

Where are we at, at the moment? On the 23 Sep, the XVI was at 18.31, with a recent low of 17.31, not quite the 15 level. But I think it’s time we watch this VIX very closely for the possible turning point in the market.

With a positive lead from the US and the lack key economic data till end the of week, we may just see the XVI dip further.


Go for gold on CNBC

Bullish on Newcrest’s Options

Airtime: Wed. Sept. 22 2010 | 1:06 PM ET
Chen Wai-Yee, head of derivatives at RBS Morgans, sheds light on the options market and why she is bullish on Newcrest Mining.


1. Synthetic long strategy on NCM.

For investors with a bullish view on gold price.

A small outlay for a potentially large gain should gold price continue to break more new highs from current level.

Sell Oct $38 put and simultaneously buy Oct $40 put,
paying $1.15 per contract.

If NCM rise above the breakeven price of $41.15, investor enjoys all upside.

Otherwise, buys more NCM shares is NCM closes below $38.

The emotional side of investing

John Wasiliev September 14, 2010 – 9:01AM.

Many people underestimate the role of emotions in trading and investing. They fail to recognise that when share markets are volatile, as they have been for much of this year, prices can be driven as much by emotion as they can by the fundamentals of price valuation. When investors are driven by greed, this emotion can see them downplay risk. In periods of extreme greed, many investors are incapable of acknowledging any risk. Conversely when investors are driven by fear, risks are overblown and the positives are downplayed. Investment decisions should be driven by a process that is as far removed from emotion as possible, says derivatives adviser Wai-Yee Chen, of RBS Morgans, author of Optionswise: how to invest sensibly. The best investment decisions, says Chen, are made by those who have a solid plan from the very outset. The best plans are disciplined and, in volatile financial markets like the present, include a clear understanding of what is meant by risk and return given they can have a different meaning for different people.

A complete plan, says Chen, includes rules that allow risk to be managed. It also includes rules on when to buy and when to sell and why you are investing. Surprisingly many investors often have quite hazy objectives. They invest simply ‘to make a profit’ without acknowledging the risks they are taking.

Part of every plan should include rules for taking profits and cutting losses. With rules a mechanical approach is often the most effective way of investing as this creates disciplines and allows decisions to be made.

The positive aspect of having a plan is that it can create some certainty for an investor in an uncertain world, says Chen. Planned investing can allow you to assess whether a particular strategy is working and worth continuing or whether you should move on.

Chen says it’s a challenge to be an investor when the market experiences waves of optimism and pessimism, as has been the case this year. Whenever markets surge, astute investors often take profits or build up cash for the inevitable correction.

On the other hand when everyone is selling and full of gloom and doom, astute investors can be found hard at work rebuilding their portfolios.

More sophisticated investors may also be trading the short side of the market through various derivatives like exchange traded options, although these require specialist knowledge.

Important with any strategy is being market-adaptable while at the same time following a logical process. While investors may believe they are behaving in a rational way, when emotion rules there can often be a conflict between their beliefs and what is happening in the market.

Useful in any strategy is keeping a clear record of why particular investments were chosen. A written note, the more detailed the better, will save having to rely on memory. It can be easy to forget why a decision was made, especially at a time when market conditions are testing.

For those who trade actively an important feature is having an exit strategy and being conscious that when an investment starts losing money, your plan should dictate how you will react rather than any emotion you may feel.


Profit from mining M&A with options on CNBC

A Safer Way to Play Mining M&A

Airtime: // Wed. Sept. 8 2010 | 1:10 PM ET

Chen Wai-Yee, head of derivatives at RBS Morgans, Asian Desk believes options strategies are a safer way to profit from M&A activity in the mining space. She explains why to CNBC’s Bernard Lo.

Buy BHP shares at $38.50 and buy Oct $37 put for downside protection.
Put premium costs 70c bringing breakeven to $39.20.
Maximum downside is $2.20.

Review by CPA Australia

CPA Magazine

Book Shelf

By Derek Parker

After the global financial meltdown, derivatives have a bad name, but Chen, a CPA and financial planner, believes they should be seen as a crucial aspect of an investment portfolio. Her emphasis in on the practical, although she admits that the effective use of options involves a good understanding of the underpinning mathematics and theory.

Chen uses four hypothetical investors with different strategies to show how options can be used in conjunction with equity investments to enhance both safety and returns. Much of the risk associated with options trading, she believes, comes from trying to use them as a get-rich-quick vehicle, but for average investors a better strategy is to utilise them for long-term portfolio building and management.

Link to the September 2010 issue on IntheBlack is below