Strangle it -2

Today: 19 May 2011

Update to the OZL strategy since 12 May

OZL went down to a low of $1.36 after the May 12 execution and has since recovered to $1.51 (19 May 2011). The 8c premium is now down to 6.5/7c.

Options strategy

For those who wish to implement this strategy now, can either:

i sell the Jun $150 put (higher strike) and $160 call for 9.5c with just 35 days to expiry; or

ii sell the JULY $140 put and $160 call (same strikes) for 11c with 70 days to expiry

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Strangle it – OZL

Airtime:Thurs. May 12 2011 | 1:10 PM ET

Chen Wai-Yee, head of derivatives at RBS Morgans expects Oz minerals to trade between A$1.4 – A$1.6

Unfortunately, the segment was not recorded properly.

Strategy is reiterated here:

Sell strangle on OZL.ASX, OZ Minerals.

Why OZL?

–  It’s a major copper stock on the Aussie market

–  OZL has fallen 25% since mid Feb – combination of fall in copper price and the appreciation of the AUD of  about 8% in that period

We think from the $1.40 level, the stock is able to travel back up to at least the $1.60 in the short term.

Why copper?

–  Copper has fallen 14% since mid Feb from above US$10,000/tonne to US$8750 now

– Inventory will get tighter from May and help some price appreciation back in copper

 The sell strangle strategy is designed to follow or mirror the range OZL had been trading in and may continue to replicate in the next couple of months. 

We will strangle the share in that range with the selling of 2 types of options.

On the lower range – $1.40 – we will sell put options at this strike to replicate the lower band.

On the upper range of $1.60 – we will sell call options to mirror the expected upper range of the stock.

 We will be doing this strategy for only 42 days, for the JUNE expiry (from May 12)

Combined Income from the selling of both of these options is 8c per contract.

How does one make money from this trade?

 1 earns 8c or 5.5% in 42 days if share trades within the range

 2 If share goes below the lower band, we are up to buy shares at $1.40 – 8c which is $1.32 (breakeven level), unless we close off the position at that price 

3 The obligation on the selling of call option is the possibility of selling shares owned at $1.60 + 8c = $1.68, if share goes above $1.60.  This obligation can be covered with existing OZL in the portfolio or with the purchase of OZL on the market at the time of executing this sell strangle strategy.

If shares were bought at the market price then of $1.46, being exercised on the call options give the investor a profit of 15%  ($1.68-$1.46).

Downside protection:

This is a strategy for a range trading stock. If the stock breaks out of the range, to limit losses or obligation to either buy or sell shares, then the investor needs to close the 2 legs off, by buying them back early.

For the put, the level is $1.32

For the call, its $1.68

The investor would have just paid the cost of trading but have not lost any capital.

Happy safe trading!

Wai-Yee