Cheap portfolio protection

http://video.cnbc.com/gallery/?video=2023400821

Profiting From Options Thu 23 Jun 11 | 11:10 PM ET

CNBC Asia with Oriel Morrison

 

Time Frame: 27 days to 21 July which is the July index expiry date

View: more uncertainties and volatilities to be played out in the market in July – Greece, China, US reporting

Expecting a potential plus and minus 100 range on the S&P/ASX 200 Index (XJO) from the 4500 level now.

Options Strategy:

Buy July 4250 put for 25 points (which is $250 after a $10 multiplier)

and

Sell July 4650 call for 27 points ($270 per contract)

for a total credit of $20 per contract (before costs)

 

How to profit?

1 Profit most if XJO index falls below 4250, where the put option will then be in the money and be very profitably moving 1 for 1 with the put option

2 failing that, with a delta of 0.13 on the put, with other variables (like time and volatility constant), a 100 point drop on the index will give a $130 profit per contract (after receiving $20 to be in the trade!)

Put option bought can be sold to take profit independently anytime during term of options

3 If XJO index stays belo 4650, the call sold will expire worthless and the whole $270 per contract will be earned.

The bet in this strategy is that the Index does not go beyond 4650 in the next 27 days, if it does, the call needs to be bought back to cut loss.

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Buying CBA with limited downside

http://video.cnbc.com/gallery/?video=1979981762

Bullish on
Australian Banks

Tue 07 Jun 11 | 11:50 PM ET

Wai-Yee Chen, Head Of Derivatives at RBS Morgans is bullish
on Commonwealth Bank and recommends that investors buy an August call at strike
price of A$50.

 

Options Strategy

Buy Aug11 $50 calls for $1.30 (with CBA at $49.20)

1 downside is limited to premium spent of $1.30 or $130 per contract (of 100 shares)

2 whilst upside is UNcapped. Call options can be sold for profit if share rises pre-dividend

3 opportunity for dividend of $1.70 (more than recovering cost spent) with right to exercise to buy shares

Breakeven for investor is call strike + premium spent.

In this case, $50 + $1.30 = $51.30.

Buyer of call can exercise to buy shares just before it is expected to go ex in mid August, if it is above the breakeven price (of $51.30) thereby conserving capital.

Spending just $1,300 for the exposure of 1000 underlying CBA shares versus spending $49,200.

If you can pick the turning point in the stock and buy it at the low point, you will maximise your potential upside with the least capital spent!

Happy safe trading!

Wai-Yee