Options on FMG

FMG.ASX (last $4.95)

There was huge volume on FMG options on Friday. In fact its weekly volume was 3 times that of the week before and about 70% more than the last 4 weeks’average of 100,000 weekly contracts. Though trading in calls doubled, but trading in puts quadrupled.

Trading on the call side tells some of the story of its trend. Most trading in calls seemed to have been buying and are mostly of out-of-the money calls as well, with high exercise price and low option price, some of these are like the Oct $650 or Sep $550 calls. These could be related to closing of sold call positions or new longs. Overall, the low volume on call trades show a lack of  stong conviction buying on the stock.

On the puts though, they were more varied. Some large quantities look to be rolling of Sep positions like the $550 puts to Oct, to reduce early assignment risks; others selling of Oct $500 puts and various other combination trades.

What stood out for FMG is not just the elevated volume but also the heightened implied volatility. Its daily average implied volatility on Friday was at 44, that’s higher than the most recent high of 42.99 in early August this year when FMG was at around $5. This higher level of implied volatility is in sympathy with Friday’s share price which has broken below $5.

It then begs the question, how high its implied volatility can possibly go? This will bring us back to the next level reached in Jul 2010 when FMG’s implied volatility climbed to as high as 51.5. FMG was as low as $4 then. This may be the next level down should there be a further sell off in the resource sector.




Limiting downside, uncapping upside

The options strategy of buying options does not always work as it goes against time. however, when it works, it delivers huge potential profits.

This could be one of those times for it. Trade without exposing too much capital and limiting maximum downside to a known amount at the upfront.

This  a $10k spend cap strategy

i) Spend about $4600 (no more to pay)

Buying 40 ANZ Dec11 $19 calls for $1.15 per contract (ANZ around $18.85)

If ANZ rises above $20.15 in early November, exercise the call, buy share and earn the 74c fully franked dividend as well. If not, just sell a higher value calls if ANZ were to go higher from here.

ii) Spend $5700 (no more to pay)

Buying 15 RIO Jan12 $68 calls for $3.80 (Rio around $63)

Sell calls to profit.

Why ANZ and RIO?

ANZ Bank (ANZ)

– More  weighted toward business banking and less towards property market(housing market in Australia is still sluggish)

– has strongest core capital position with least reliance on offshore funding market

RioTinto (RIO)

– cash rich

– potential for buy back in the short term

Hedge with positive cash flow

Fri. Sept. 16 2011 | 1:10 PM[05:05]
Wai Yee Chen, Head of Derivatives at RBS Morgans is bearish on the XJO, saying it will not rise above 4300 before October 20, but has a hedge in case market heads higher.
Details of the option strategy was posted on Friday 16 Sep. With the market pulling back about 67 points to 4082 now, this XJO bear call spread is now trading at a net price of $350 for both the calls.
Sold for net $500 and can be closed at $350 today after the weekend for a profit before cost of $150 per contracts.
But, this short term gain can be left alone and let time does its work, to allow the call options to lose more value, either through time erosion or value erosion if XJO continues to languish.
Hold on to gains for now.

Options actions on Aussie retailers

MYR closed at $2.08 last Friday 16 Sep 2011.

During its results on Thursday (15 Sep), management announced they expect sales to be  flat  in FY2012 with a net Profit of not more than 10% below that of FY11 (it’s expecting a better Christmas this year!).

Based on the share price which has fallen since then, it looks like the market has not fully embraced management’s view.

Trading in puts have increased last Thursday and Friday as well. The series attracted large quantities were the Oct $1.95 put and Nov $2.00 put. With $2, being the lowest level for the stock so far, which will be a support level, investors are getting some protection at the $2 level, just in case. Moreover, with MYR expecting to go ex-dividend with 11.5c fully franked dividend on 26 Sep, stock is expected to slide down slightly after as well.

Other retailers – HVN and DJS did not have similar negative sentiment last week.

What’s interesting though, was end of August and early September when the XJO was trying to break above the 4300; where it closed at 4396 and 4307 respectively. On those 2 days, trading in call options on those three names, MYR, HVN and DJS, increased.

This action is suggesting to me that these retailers are some of the names that the market is using as leverage to a recovery in the market.

Some trades to bare in mind, when we next get a break above 4300 on the XJO!


It looks the market was not inspired by its results on Thursday.

Some hedging, some income

This is a trade for those who are a little more aggressive (not for super funds).

There has been a lack of a sustainable and healthy recovery in the market. The market is moving in waves and I am seeing two of these.

The larger one is between 3765 (9 Aug low) and 4500 (last seen 1 Aug) levels on the XJO and there is yet a smaller wave within that between the 4000 and 4300 levels.

This is a trade to capture the waves of the market and at the same time getting some income into the portfolio.

Options strategy:

Sell oct 4300 call and buy oct 4500 call for a net 50c credit

Max gain in 34 days (to 20 October expiry) is $500 per contract ,if XJO stays below 4300 and maximum loss is $2000.

Possible scenarios:

1 XJO below 4300 at expiry. Max gain of $500. both options expire worthless.

2 XJO plunges during options term, the lower it goes, the cheaper it will be to close off the 4300 sold call and lock in the profit

3 XJO rises above 4300.
Breakeven for this trade is 4350, where trade can be closed off with just the loss of costs spent.

4 XJO rises above 4500.
Maximum loss is $2000 per contract + costs spent.

Options actions on Energy Stocks

Sky News Business Monday 12 Sep 2011 10.10am

Reporting on Australian Options Actions week ended 9 Sep 2011

1. STO.ASX (9 Sep last $11.52)

STO stood out with its high volume of trading on calls on Friday, 18000 contracts. Second highest volume behind the XJOs.

The series that attracted high trading volumes were in Sep 1225 calls and Sep $1178 calls. They don’t appear to be opening trades though, appear more to be closing of calls written or rolling of bear call spreads.

Looking at calls traded on STO in the last two weeks, the last time it attracted more than 10,000 contracts per day was on 1 September, when STO hit an intraday high of $12.19.

Options trading pattern may be suggesting the market has identified a trading range of the stock, $12.20 to about $11 for now. Strategies have been positioned at the range.

2. WPL (9 Sep last $34.02)

With WPL trading around the $34 level last week, options volume on WPL has dropped off . Its weekly volume of both calls and puts together were only about 36% of the week before.

Its Implied Volatility have calmed down as well for its Sep and Oct expiry terms and they have gone below Historical levels by 9% and 7% lower respectively.

With this lower volume and lower Implied Volatility, this may be signal that aggressive selling or shorting is slowing in WPL and could be start of base-building around the $34 level.

3. ORG.ASX (9 Sep last $13.20)

Total options volume on ORG last week had been steady compared to the week before, but trades were more tilted towards the puts. There were 80% more puts traded than the week before.

In analysing its open positions in Sep puts, the top two largest Open Interests were the Sep $1507 and $1459 put series which are quite deep in the money comparing with ORG’s price of about $13. The higher volume on the puts could be attributable to rolling of those puts to reduce risk of assignment.

Trading on the calls though, the lower volume may be a signal of a lack of opening of fresh positions in the share.

Rio above $73

Rio closed at $72.05 on 2 Sep.

This looks like a follow on from the failure to stay above $73. The key day was last Thursday when RIO touched a high of $73.81 and reversed down to close at $73.08.

RIO’s Options Actions

On the call side, volume is like the week before. Removing the anomaly of a crossing of 35,000 contracts on Sep11 LEPO on Wednesday last week, number of call options traded were at an average of 12,000 daily contracts. The volume on put, on the other hand, has dropped off to just 9000, this is a drop from 20,000 last week and a more average of about 15,000 daily under normal trading conditions.

Volume is showing traders were not aggressively going short on RIO.

RIO’s Implied Volatility

RIO’s Implied Volatility stood out with a sharp fall. Its  30, 60 and 90 days options, ie next three months are displaying low volatility. Especially with the 30 day’s, its Implied is sitting at about 26 versus the historical’s of 46 .

This is reflecting the smaller range the stock has been moving in the last 2 weeks and the expectation of it continuing in a range in the short-term.