Where to now, S&P/ASX200 touched 4801 this morning

What’s next?

That’s the question top of mind, as investors revisit portfolios and traders returning to desks after the holidays, to a buoyant market. so far this month to 21 Jan 2013, the XJO has returned 3%.

4800 level of the XJO is a level not seen for 2 years.

Last time we were at this level was late Jan/early Feb 2011

Let’s look at the market’s volatility in Feb 2011.

The XVI then was 16%, after touching a low of 12.5% 2 months before (Dec 2010).

This cycle, same level on the XJO, but the XVI touched a low of 10.5% (last Thursday).

Points to note:

– since 10.5 last Thursday, in the last 4 trading sessions, the XJO has been staying above 11%. Volatility has been trending up. Not a signal to sell the market, but indeed, investors are more vigilant as they come back and LESS complacent.

– the VIX index in on the CBOE was at an all-time low on Friday as well 12.5. but has not shown the trending up we have seen locally in Australia.

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What to do in a ranging stock market ?

The XJO dipped to a low of mid 4200 in early Sep12 and rallied to mid 4500 in mid October.

If you share the view it’s likely to mirror the range from now to pre-Christmas and want to make an income from it, then we’ve got a trade.

Go long at 4300 Dec12 XJO by selling put
Go short at 4500 Dec12 XJO by sellingcall. Together the combination gives 40 points credit or *$10, $400 per contract

Set aside about $2k cash or share value per combination of the trade and leave it alone till 20Dec12. Meanwhile XJO can go anywhere it wants to, there shall be no implication. As long as it stays within 4300 and 4500 on 20dec12.

Hurricane Sandy and QBE

30 October 2012 2:10pm

QBE touched a low of $12.95 this morning and has recovered slightly to be trading a bit above $13.00

Top of mind for traders are: i the potential liability of SuperStorm on QBE’s earnings ii will it meet is FY12 guidance

Well, though impact of storm is still too early to tell, but QBE has 2 defenses for now: catastrophes had been light in 2012 and it has increased its provision from premium for 8% ish to 10% ish. So, at current state of play, yes, it’s likely to meet FY12 guidance.

This uncertainty has caused Implied Volatility (IV) in QBE to spike

Rrecent low of IV when stock hit $14, was 19%

last few days as stock fell a dollar from $14 on 19 October, IV has spiked to 24% yesterday.

Spiked IV, prime for options selling.

Those who don’t hold a bearich view on the stock, had been selling

Dec12 $13 and Dec12 $13.25 puts

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

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.

WES…time to short?

There’s a potential trade in WES.

If you share the following view:

i. WES likely to fall from around this level ($32.55) on 1 Aug 2012 time of writing

ii. Not likely to fall below $29.50 to Oct (quite a lot of support from $29 to $29.50 on the stock, see chart)

 I. Options trade to take advantage of potential fall:

 1 Buy Oct $3000 put and

2 sell Oct $2951 put

Costs and max loss is 10c per contract

 If WES falls to about $30,

This spread is likely to generate a 100% return, making it about 20c gain per contract

 Max gain possible tough is 40c. Capped, no matter how much WES falls

II. to buy WES

For those who wish to pick up WES at around $29.50 in Oct though, say 2000 underlying shares, spend $200 on this trade now for the potential to pick up shares later, plus potentially 40c profit at the time of buying

wes

General information only. Personal advice cannot be provided in this forum. If one is needed feelp free to contact me.

EU Summit? Get a two way bet in

Thurs. Jun. 28 2012 | 1:50 PM[04:24]
Chen Wai-Yee, Senior Adviser, Derivatives Specialist at Ord Minnett gives us her options trade to bet on a break out on the ASX 200
Long strangle strategy on the XJO Index
A drop of 135 points renders put breaking even on the combo
whilst a rise of 105 points on calls renders calls breaking even on overall cost
Buy put and buy call strangling the current index in the middle
limited loss
Unlimited upside