TLS.ASX closed at $3.33 on 6 June 2012. This is a 18 month high for TLS. Stock is expected to go ex-dividend in third week of February.
How can shareholders take advantage of TLS’ strength and earn even more income from it with the use of options strategy?
Before going into the strategy, let’s look at some of the drivers/motivators (or lack of) for the stock in the next 2 months:
1 One of the driver which had been pushing up TLS is its upcoming dividend which is expected towards 3rd week of February. The impetus for this motivator would not be there from the 2nd week of January, as the 45 day holding period of the stock has lapsed. This 45 day holding period is important for those who intend to buy the stock for the dividend and franking credit, with the objective of selling the stock on the first day it goes ex dividend. Holding less than 45 days will render shareholders foregoing the franking credit. This 45-day motivated buying will cease from week beginning 9 Jan 2012.
2 Next is TLS’s share price. It has reached close to a 18 month high above the $3.40 level last week.
3 The third factor about TLS is very important. This is the divergence between the rising share price and falling Implied Volatility (IV) on the stock. This divergence at the moment is stark. The gap/gulf between the two is very wide, ie share price at the top and its IV at the bottom. A similar divergence is seen back in Dec 2009 when TLS was sitting at the then peak of around $3.50 whilst its IV was also at its then bottom range. At the peak then, the IV was at around high of 17, before dropping to early 13 and then rising from there as the stock price came off from the $3.50 top.
Now this time around, we have seen TLS’s IV dropping to a very low reading of mid 11 before Christmas. Since then, the IV has been climbing. As of Friday (6 Jan 2012) it’s IV was at early 18. What about TLS’ share price? It hit a high of $3.42 last week Tuesday. With the IV climbing from its low and the share price at this high level, it is suggesting to me TLS has hit a peak and is more likely to come off from this level.
4 Last component is options actions on TLS. There are large quantities of calls opened in the first three months of the year. The two largest opened strikes (apart from LEPO) are the $3.20 for both Feb and Jan 2012.
Putting the above together, it’s time to write covered calls on TLS, locking in some premium in addition to the upcoming dividend would serve its shareholders well with enhanced income.
The 23Feb12 $3.21 Calls last traded at 3.5c on Friday. Writing this European call will ensure one’s shares don’t get called away before dividend, whislt earning an extra 3.5c.