Follow up on 17 Feb Synthetic Long on FMG

On Thurs. Feb. 17 2011 | 2:10 PM I spoke with CNBC’s Oriel Morrison on how investors could take advantage of a bullish view on iron ore and through FMG specifically. You can review the strategy in the video below.

Investing in Yuan options and Strategy on FMG  

Obviously, much has happened in the last two weeks. The event in Japan and to some extent geopolitical issues as well has overtaken the market. Stocks fell and especially resources as well. The recovery we have seen end of last week was indeed some relieve. 

Now with March expiry approaching Thursday this week, this strategy on FMG gets exciting. It comes alive again! With the recovery we have seen, with the stock jumping more than 4.5% to $5.94 on Friday, there is hope the stock can get to $6.75 on Thursday. In fact, a highly possible range is $6.25 to $6.75 (from options actions observations). 

Recapping the synthetic long strategy on FMG on 17 feb, the strategy involves the:

Buying of the Mar $7.25 call (10c dr) AND

Selling of the Mar $6.75 put (20c cr)

for total income of 10c

Possible outcomes this Thursday:

1 FMG closes at or above $6.75

investor gets out of this strategy with 10c credit (having come back from a losing position)

2 FMG closes below $6.75

a. investor closes out put options to avoid assignment of shares

b. investor buys FMG shares at the breakeven price of $6.65 ($6.75-10c)

Now, if scenario 2b happens or is chose on Thursday, this is the remedy strategy investors can undertake to further reduce the breakeven price of share, by:

Selling  Apr $5.75 put (22.5c credit) AND

Selling  Apr $6.75 call (5c credit)

 For Total income of 27.5c per contract

This will reduce the entry price immediately to $6.38.

Your obligations for the above income will be:

 to buy more FMG at $5.475 or sell the FMG you bought at $6.65 for $7.025


Protecting shares you want to hold during the quake

Energy stocks seem to be the ones that can hold the best and in demand during this period of devastation in Japan.

Origin Energy ORG is defensive and well managed and is the pick of the crop. But, it’s under trading halt to undertake a placement.

Next choice is Santos, STO. If you already own the stock and would like to be protected from downside in the stock can look at employing the collar. With example below, investor gets protection whilst getting paid $100 per 1000 shares (1 contract), before costs.

STO closed at $13.80

To protect against losing below $13, buy $13 put for Jun11. To recoup some income to cover cost, sell $14.50 call. For the month of June, combination of those two trades can give you a credit of 10c per contract.


1 sell the stock you have at $14.50 + 10c credit = $14.60. It will be a risk if you cost price is higher than that. The compensation is for protection to $13 + 10c credit = $13.10.

Japan and the XVI

Where is the market heading?


1 XVI is updated retrospectively by ASX, ie. XVI for today is not known till tomorrow morning

2 XVI is our very own VIX index, the fear gauge of the Australian market, calculated over the ASX/S&P200

3 VIX or XVI for us typically goes in reverse to the underlying market performance. If the peak in XVI can be identified, then we may be able to identify the turn (on the upward) in the market

What is XVI’s recent peak and where is XVI now?

XVI last peaked at 21.9 in mid November when the XJO plunged from failing to break 4815 to 4560/80. This lower level of 4560 is now broken.

The peak previous to that was 27.22, which twas around third week of August 2010 where the market fell to around 4320 (oh..oh). That’s highlighted in chart below.

As of today (Tuesday) which is reflecting our Monday market, was at 21.6.

If volatility is a guide, there may be more to come.










Flat but not out with options

29 Mar 2011, Singapore 7 – 10pm

What’s your temperament?

by TraderPlus Editor — ISSUE 2 — JAN/FEB 2011
You need a different mindset for different circumstances to be a successful trader.
By OptionsWise author Wai-Yee Chen
What’s your temperament?  

What is the temperament of an options investor? To most, the word “conservative” would not fit the bill. What about these words – “Sanguine”, “Melancholic”, “Choleric” or “Phlegmatic”? These are now common terms used to describe certain personality types of people. These four personality traits trace their roots back to some two thousand years ago, to a Greek physician named Hippocrates, who studied human temperaments.

The temperament theory, which is based on human behavior, moods and emotions has since been further developed and various aspects added by other researchers and psychologists. Based on their work, we now have the opportunity and benefit of understanding ourselves better as an investor – especially as an options investor.

Did you manage to fit yourself into one or two of those traits? Some of you may have been disappointed, like me. I thought I have a schizophrenic personality as I just couldn’t pin myself down on one or two and find that I am not only evolving but am in different traits at different times. Is this normal? I think I read somewhere that’s all right.

I find that to be a successful options trader or investor, one actually needs to assume different traits at different times.

We need to be Sanguine, to be creative like an artisan, to come up with creative trading ideas, especially in the current market, which trades in a tight range (the S&P/ASX200 ended 2010 with a minus 2 after a busy year). For the options investor, this trend is compounded by a very low volatility on most stocks. The XVI (which is the S&P/ASX 200 VIX index), which gauges the volatility of the market is currently at the mid-teens near to its all-time low of 12. When volatility is low, options premium tend to be low. This tends to favour buyers of options. However, buyers of options suffer from time erosion. In order to make money, buyers of options need the underlying share to perform (up for a buyer of calls and down for a buyer of puts) quickly, to profit from it. This request may be a big ask in a side trending market.

A couple of cautions of the impatient Sanguine options investor would be the risk of over-trading for returns in a side-trending market and being impulsive in coming up with trading ideas.

A Melancholic is a sensible options investor and is very risk aware, often not only considering the reward but also its risks. The guardian in him would rarely find him being caught in naked trades such as selling of naked put without the resources to fulfil the buying obligations or selling of naked calls without the holding of the underlying shares. A Melancholic options investor is more likely to be found in trades such as put spreads, where the downside of a trade is limited and known at the upfront. His sturdy and sensible manner often takes over and hedging strategies is often top of mind.

There is a trap a Melancholic options investor needs to be aware of though, one that he will constantly face, stemming from the tendency to hoard. This is the aversion trap, which is the mental trap of regarding “losses (paying of cash) twice as painful as a similar amount of gain”.  A Melancholic options investor may find himself less inclined to pay cash to close off and lock in profits in a short (or selling of options to open) position. This can be in a covered call position or a short (selling of) put positions, both the calls and puts which were first sold (to open) can now be bought back at a tiny sum to close off and lock in the profits. A Melancholic options investor will struggle with this decision, but is best to overcome his weakness and enforce the profit taking strategy. As often, short calls and puts though may be covered, but left unclosed turn the other way at expiry and render an initially profitable trade to be a loss.

The Choleric options investor is hopeful and is intuitive in his investment style. His optimistic nature may be what’s needed in a side-trending market to try new strategies and experience new shares.

The Phlegmatic options investor is a rationalist, one who needs to work through the scenario analysis of both gains and losses. The logical mind of a Phlegmatic would benefit from the use of options, as often, both the up and downsides of a trade can be known at the upfront, even before the execution of a trade. Knowing the maximum potential loss of a trade is comforting to a rational Phlegmatic, especially when shares or strategies go wrong, where the calmness of a Phlegmatic will then take over.

To be a successful options investor, we need to be creative like a Sanguine in a side trending market, Melancholic when market turns volatile, Choleric in a dull and slow- moving market and retain the rationale of a Phlegmatic in all markets.

These are some of the descriptions of the four personality types (the last being the weakness of that trait): 

Sanguine Lion (bold), artisan  Impulsive 
Melancholic  Ox (sturdy), guardian, sensible  Hoarding 
Choleric  Man (humane), enthusiastic, intuitive  Oversensitive 
Phlegmatic  Eagle (far-seeing), rationale, thinking, calm    Skeptical 

MQG…turning the corner

I was commenting yesterday in the Financial News Network options blog that it was time to watch Macquarie Group (MQG.ASX) closely.

Looks like today, it’s the time to jump in already.

MQG’s share price has been falling from a high of $41.95 after its earnings downgrade in early February. At the current price of $36.45 (7 Mar 2011), that is almost a $5.50 fall or 13%. Perhaps the lower earnings is now reflected in the share price?

Based on our chart analysis, the important level to watch is $35.57. It looks like MQG reversed back up today without touching or going near the support. Based on our fundamental research, our analyst is still expecting a 15% ROE from MQG within 3 years. What’s more exciting is its upcoming dividend, expected to be around $1 early May.

I would like to take advantage of this weakness in the stock and to be positioned for the upcoming dividend.

Options investors can look to sell April puts. April $37 put is giving about $1.30. This is slightly in-the money with the stock now trading at $36.70, but this increases the chance of acquiring the stock. If assigned, the investor will be purchasing MQG at $37-$1.30 = $35.70 With $1 soon after, immediate return is 2.8%

Rotating banks with options…CBA/ANZ

Thurs. Mar. 3 2011 | 2:10 PM[04:45]
Chen Wai-Yee, head of derivatives at RBS Morgans Limited, explains how to invest in Australian banks using options.
Banks have been recent casualties in the Middle East unrest, with safe haven money going into gold and risk averse investors buying into oil stocks. Four major banks in Australia have fallen and have opened up an opportunity for investors to position themselves for the next wave of dividends in May/June.
Looking ahead to the next three months, banks will likely trade within the same range they have done in the last 2 months. There is not enough of a pull to pour fresh money into the sector. A better way to use money already invested in the sector is by rotating money within the sector.
Which to rotate out of? With CBA having gone ex-dividend just a few weeks ago with $1.32 dividend, is a prime candidate to be rotated out of.
The one to rotate into? ANZ and NAB are RBS Morgans’ top 2 picks, but as both are quite the same on fundamentals at PE of early 10 times and dividend yield of early 6%, but as ANZ has fallen 8% whilst NAB 4%, ANZ seems to be more attractive at current price point.
Option strategy:
Sell CBA April call options and
Sell ANZ April put option.
Suggested strikes are $53 on CBA and $23.50 on ANZ respectively. Selling of every 1 CBA entitles the investor the funding to sell 2 ANZ puts ($53,000 sale proceeds for purchase of $47,000 ANZ)
Total income was $1.15 for call + 50c each *2 for puts = $2.15 for both legs
But these strikes can be adjusted according to the investor’s desires. For one who is more keen to sell CBA shares, sell in-the-money call like a $52 strikes or under for higher income. Alternatively for one who is very keen to buy ANZ shares, sell in-the-money put at $24 or higher and be entitled to higher premium income.
The two risks that investors need to be aware of with this rotation strategy are:
1 not being successful in buying ANZ shares (if it closes above the put strike), if ANZ rises strongly before April expiry
2 not being able to sell CBA as share weakens below the chosen strike and ANZ is assigned. The investor will then end up pouring fresh money into the sector.
Otherwise, if both legs were unsuccessful (in terms of selling CBA and buying ANZ) a nice income is earned for the portfolio.