FMG secures US$4.5b credit facility – options activities

1) trading in FMG options last week (with a fall of 13.8% on Thursday 13 Sep down to $2.99)

Volume – low all last week for both calls and puts. Average weekly contracts were about 20,000.
Only hint was some 40,000 contracts traded on puts on Thursday. However, in a day where the stock fell some 14%, that sort of put volume was normal.

There was no acceleration in puts at the $2.99 level.

Last week, rather quiet on low volume on FMG options

2) Today, with FMG back from trading halt, stock opened at $3.44

How’s volume: very good. Ending the day with about 50,000 contracts of calls and 62,000 in puts. Above average.
The higher put volume is a pick up in the afternoon, as for most of mornings, trading in calls and puts had been quite balanced. Closing with higher puts traded

some larger trades: large volume went through early morning were at the $3.50 strike for both calls and puts at Sep and Oct . Straddle at $3.50.
$3.50 seems to be a pivotable mental point for traders

Implied volatility: spiked for September expiry. With a historical of 89, it has spiked up to 100 for both calls and puts. ASX has also increased the Margin Interval for FMG options today. Higher volatility expected to stay.

Summary: speculation of option traders’ mindset on FMG – circumspect.

FMG closing price on 18 Sep 2012: $3.50

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Bear Put Spread on the defensives

Defensive stocks had done well in Jul and Aug

In that category is Wesfarmers WES.ASX and Woolworths WOW.ASX

In Jul and Aug combined, WES returned 15%, WOW 10% versus the XJO’s return of 5.3%.
They have outperformed.

In September, we are seeing some pull back in both shares, particularly they have both gone ex-dividend as well.

Next 5 months, let impetus, investors may take some money out of defensives to either move to next dividend paying stocks like the banks or should risk appepite increase, move to growth stocks.

Strategy to play on the downside:
Buy Nov 3450 put and sell Nov 3251 put
cost today with WES at $34.15 is 66c per contract or $660

How to profit?
As long as WES falls from here.

If WES rises, max loss is 66c spent, but could breakeven by selling long put leg ($34.50) out should WES runs up a dollar from here.

If WES drops all the way to $32.50, the this bear put spread can almost double.
Either close spread out or just take profit on the long put leg ($34.50), leave $32.51 put alone for potential to buy stock at the level.

At $32.50, will be buying stock at PE of 16x (vs 17.2x now) and 5% fully franked yield (vs 4.8%) for FY13.

Strategy to benefit on the way down with the potential to pick stock up at $32.50.

Fortescue (FMG.ASX) shares at 3 year low

Following my commentary on SKY business on Tuesday (4 Sep), P/C ratio on FMG has continued to deteriorate.

Last week (ended 31 Aug):
– saw huge volume on puts trading
– weekly puts traded increased by 44% (vs calls increase of 22%)
– Weekly Put/Call ratio was at 2.5 times

In the last two days, puts have continued to dominate and this is happening at very high near term Implied Volatility. It’s a sign of aggressive put buying.

If history is a guide, with historical IV peaking at 63% back on 4 Oct 2011, with the current reading of 54.5, it may not be over…