Time to Sell Wesfarmers and Buy Woolworths

Time to Sell Wesfarmers and Buy Woolworths.

Tue 25 Oct 11 | 11:10 PM ET

Wai Yee Chen, head of derivatives at RBS Morgans, Asian Desk thinks that short interests have been building up in Wesfarmers, and investors should sell Wesfarmers at $31.02 and buy Woolworths at A$ 24.01 for a combined income of $1.70

 

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Swap shops with options…WES,WOW

We are going to do a long/short pair trade today.

For those who are holding WES shares, it has risen some 10% since it went ex-dividend on 23 August, whilst WOW is still around the $24 level.

Though WES has outperformed WOW, but based on the latest quarterly sales report, WES has warned of softening margins for Bunnings, Target and Kmart. More so, based on RBS short-interest screening, short interest in WES has been increasing by 0.3% (31bp) since early Sep.

There is a chance WES will come off from $31.50 level whilst WOW bounces off from the $24 level.

For the potential to sell WES or take some income off the table,
Sell WES Nov $31.02 calls for $1.20

One who is holding 1000 WES, would earn $1200 at the start
of the trade.
Otherwise, if assigned to deliver, WES will be sold at a breakeven price of $32.22 ($31.02 + $1.20)

To get entry into WOW shares potentially,
Sell WOW Nov $24.01 put for 50c

Breakeven purchase price for WOW is $23.51
(Need cash reserves for possibility of buying shares)

Possible scenarios:
1) If WES falls and WOW rises as expected and there was no assignments, then combined income of $1.70 is earned

2) If WES does not fall below strike of $31.02 (another 50c from here), then WES shares will sold at the breakeven price ($31.02 + $1.20)

3) If WOW does not rise from $23.90, then investor buys WOW at breakeven of $23.51

4) There are 2 other more complicated possibilities (for even better outcomes).
WES get sold but WOW rises and not assigned to buy, then WES is sold at $31.02 + $1.70
or
WOW is assigned to be bought, whilst still holding to WES, then WOW is bought at $24.01 – $1.70

In summary, best outcome for income is WES closes below $31.02 and WOW closes above $24.01 at expiry.

Happy Trading!

FMG

FMG has fallen the most out of the three resource stocks last week, FMG down 13%, RIO down 8.4% whilst BHP has held steady down only 3.2%.

Closing at $4.25 on Friday, its close to the $4.00 level it fell to in early October before rising to around $5.15.

Good chance FMG will move back up to the early $5.00 like what it did 2 weeks ago.

Supported with third quarter result on target, progressing well to expand to 155Mtpa,with cash of US$2.1b and US$4,3b expansion work committed.

A $6k spend to take advantage of impending turnaround.

Buy Dec11 FMG $425 call and sell Dec11 $525 call
for net cost of at least 30c(estimated based on theoretical. A guide till live prices can be obtained)

The spread has a net delta of about 0.3
A $1 rise on FMG will return about 30c to the spread, doubling money.

Trading ANZ With Options

Trading ANZ With Options.

Thurs. Oct. 6 2011 | 2:10 PM[05:15]

Wai Yee Chen, head of derivatives at RBS Morgans, says that trading ANZ using options limits capital at risk and gives dividend exposure.

A synthetic buy write strategy, limiting capital spend and maximum loss, capped to $21.01 in November 2011.
Buy an American Nov11 $19.50 call (for right to exercise anytime) and sell a European Nov11 $21.01 call to avoid assignments until November expiry of 24th. Spread was costing 60c with ANZ at $19.10. Today with a 4% run on ANZ to around $19.90, spread is costing 88c (47% gain).