NCM is being squeezed up…

Early this week (21/11/11), I wrote on the Finance News Network blog that NCM was pressured from a high of $35.65. Today (Thursday), NCM touched a low of $33.52 and is trading above $34, some 90c reversal during the day.

The message for me is: Time to buy on weakness today.

NCM fell to a low of $33.52 in the morning is now down only 33c at $34.17

Chance to go long on NCM and earn an income at the same time.

Dec expiry is on 22 Dec, only 28 days to go.

Sell option for some Christmas income!

Strategy:

Sell 20 NCM Dec11 $33.82 put for 85c

This is an income generation strategy.

But need to be able to purchase stock at $33.82 (though breakeven is $32.94).

Potential exposure is $67,640 for 20 contracts.

Will NCM move with the gold price?

On 2 Sep,  NCM closed at $39.10 with Spot Gold price closing at US$1876.

NCM’s performance compared to Spot Gold

NCM has underperformed by 20%. NCM’s recent high was at $41.50 experienced on 21 July when gold price was at US$1601. On Friday, at $39.10, NCM has fallen about 6% whilst gold price has risen 14%, that’s an underperformance of some 20% by NCM. NCM’s share price has now settled into a very tight trading range, between $41.50 and $38.02.

Trading range

This small trading range in the stock is reflected in the drop off in the volume of options traded as well. Especially last week total calls and puts traded were almost half of the week before. Daily contracts were about 14,000 compared to the average of about 24,000 contracts per day in the last two weeks. This is reflected in its lower 30 day Implied Volatility as well, 26 versus historical’s of 31.

NCM Options Actions

Despite gold price staying above the $1850 and had moved strongly, options market does not seem to expect NCM to move too much away from the range though. In fact,  looking at last Friday’s actions, calls and puts were quite equally traded. Some of the larger trades observed were bear call and bear put spreads.  Selling of Sep $41 calls and selling of the $39 puts were observed.

Australian Options – NCM, BHP, RIO

Sky News Business Monday 18 July 2011 10.10am

Reporting on Australian Options Actions week ended 15 Jul 2011

1. NCM.ASX (last $40.27)

Gold has been a stalwart in the last 3 weeks. Whilst the S&P/ASX 200 has basically done a boomerang in the last three weeks (started and finished around the 4470 level), NCM has climbed 10.4%; outperforming not just the Australian market but also the US dollar Spot Gold price by 4.5% (which closed at USD1592.99 on Friday). After such a strong 3 week performance and NCM at early $40, what are options traders’ thinking?

Firstly, volume in NCM options have increased in the last two weeks and domination has switched from puts to calls in the last 2 weeks. Especially on Friday last week, some large quantities of bear strategies have been observed.

On the put side, large quantities of buying were seen going through the Jul $3950 put which appears to be part of a bear put spread strategy which was accompanied by the selling of the Jul $3800 put.

Whilst on the call side, large quantities of the Jul $4100 calls were traded, which were accompanied by some bear call spread strategy as well. The July and September calls were popular.

In summary, having risen 10% in just 3 weeks and sitting above $40 last week and with higher implied volatility on the stock, some bear spread strategies which involve the selling of options to capture the higher premiums have set in. These strategies may be a precursor to the stock turning down.

2. BHP (last $42.89)

Following BHP’s announcement of its acquisition of US’ shale gas operator Petrohawk for US $15.1b on Friday, BHP‘s share price has reacted with a fall of 71c of 1.63% on its share price, whilst its peer RIO rose 0.5% instead. The view is mixed. Based on RBS Morgans’ preliminary modelling of the assets, the deal is 1% EPS accretive in the first year, and 1% NPV dilutive. The key risk is oversupply in the US market, which may suppress prices for an extended period. Long term though, if export capacity can be opened up, this may lead to a greater level of pricing tension (some way off). While the deal helps BHP gets a foot in to the US gas market but the acquisition reduces the chance of a buyback being announced in its August results as well, which was a catalyst for the stock.

How did options traders react to the deal?

Options volume on Friday, doubled that of last Thursday and Wednesday but there has been no change to the trend of the stock though. Trading is more active on the put side. The put/call ratio for BHP sits more on the bearish side with an average of 1.3 times for the week.

The larger trades seem to be a combinations of bearish strategies.

On the call side, selling of Jul $4450 call was popular and some were accompanied by buying of lower call strikes as a bearish strategy.

Puts were active and the larger trades were the selling of Jul and Aug $4300 puts which were combined with higher strike puts like $4400 to create bear put spreads.

Overall, the balance seems to be on the bearish side on BHP.

3. RIO.ASX (Last $81.36)

Despite the more positive trading session on Friday versus BHP,  from options perspective, the actions are quite similar. Put/call ratio is negative on RIO with an average of about 1.4 on a weekly basis in fact, Friday’s put/call ratio was at 1.78, worse than the weekly average.

Some of the trades observed were the selling of Jul $7200 and $7900 puts which were combined by buying of higher strike puts like the $8000 or $8200.

At the call end, selling of Jul and August $8200 calls were observed.

As Friday’s move up (on RIO) was not accompanied by higher volumes, the weak trend experienced in BHP and RIO, may continue until turn arounds are signalled.

 

Options on Egypt unrest

With the built-up of unrest in Egypt, oil price and gold jumped, $3.70 and $22.82 respectively.

How can we take advantage of the price movement?

1. Oil

Out of the three key oil stocks, OSH (Oil Search) has underperformed oil price (and the index significantly).

In the last month, OSH has fallen 6.4% whilst oil price fell 4.4%, OSH underperformed.

STO (Santos) on the other hand rose 2% , whilst WPL (Woodside Petroleum) fell 1.6%, both better than the oil price.

Observing the options actions on all three stocks though, WPL has been displaying negative put/call ratio sentiment for more than two and a half weeks now. Last week, its put/call ratio was 2 times more puts than calls traded. OSH though has been gradually improving on its indicators.

You will see from the chart below that whilst OSH (red) has retraced in the short term, it has remained in a positive trend whilst WPL (blue) may have more underperformance to come.

The chart of daily prices over 6 months for security OSH

Out of the three, OSH looks like a better bet on the oil play.

2. gold

NCM has fallen 10% versus gold price which has lost 5% in the last month to 30 Dec (and significantly underperformed a flat S&P/ASX200 (XJO) index)

The chart of daily prices over 6 months for security NCM

Gold has been sold off as fear seemed to have precipitated in the last month, but NCM has been sold off more.

Its volatility has remain high with put/call ratio indicators being negative from last week. Traders may have been caught surprise by the jump in gold price overnite.

With the jump in gold price and volatility to follow suit, those who are looking jump in may augur will by selling put options in NCM.

Fool Proofing Your Gold Investment

Published: Sunday, 17 Oct 2010 | 9:55 PM ET
By: Deepanshu Bagchee, Senior Producer, CNBC Asia Pacific

Gold prices have been hitting record highs almost every day in recent weeks. For investors trying to figure out what to do, the situation gets more confusing when expert opinions on the outook for the yellow metal are as diverse as they are contradictory: Goldman Sachs says prices will hit $1650/oz within 12 months, but French bank Natixis says prices will actually decline in 2011 as the global economy recovers.

While Uwe Parpart, Chief Economist and Strategist for Asia at Cantor Fitzgerald, says all investors should own some gold in their portfolio, it’s easier said than done, as predicting the price of gold is just as tough as timing the stock market.

There are many ways to buy gold. You could buy an exchange-traded fund (ETF) such as the SPDRs GLD, mining stocks, futures contracts on the precious metals or the physical bullion itself. Each of these has its pros and cons.

Buying gold and storing it in a vault costs money and isn’t always practical for retail investors. Instead, John Stephenson, who’s written The Little Book of Commodity Investing, recommends investors buy shares in mining companies.

In his book, Stephenson argues that commodity ETFs, while popular, often suffer from “tracking error”. That means the ETF doesn’t always keep up with the rise in the price of the underlying commodity. For example the price of spot gold is up 26 percent this year (as of October 14th), while the Gold ETF GLD is up only 22 percent.

Buying mining shares though can mean buying execution or business risk. For example, Australia-listed miner Kingsgate recently warned that production in September was lower than expected because of maintenance at their flagshop Chatree mine in Thailand as well as heavy rain.

You could also to use options to bet on gold prices. Chen Wai-Yee, the head of the derivatives desk at RBS Morgans in Sydney and the author of the book Optionswise: How to Invest Sensibly, says this is the best way to protect your gold investments.

For example you could buy a Call Option on Newcrest. The shares are currently trading around A$42.50 ($41.92). By buying a December Call Option with the strike price of $44, you have the opportunity to buy the shares on December 23rd for $44 a share.

Let’s say, the option costs just A$0.70. If by December, gold prices have risen even further, it’s possible Newcrest shares could hit A$50. In that case you stand to make A$50 minus the agreed upon price of A$44 and the cost of the option of A$0.70. That’s a total of A$5.30. Since you buy options in sizes of 1000 units, your total profit would be A$5300.

But what if gold prices drop causing Newcrest’s stock to tumble? To protect against this you can buy a December Put Option with the same strike price of A$44. In this case if gold prices tumble and Newcrest shares fall to say A$40 (a decline of 8.5 percent), you have the right on December 23rd to sell shares of Newcrest for A$44.

How do you sell shares you don’t own? Easy, you can buy the shares for A$38 in the market and sell them at A$44. Let’s say the option costs you A$1.50, you end up with a profit of $4.50 (A$44 minus the purchase price of A$38 and the cost of the option of A$1.50). Once again since you buy options in lot sizes of 1000, your profit would be A$4500.

By buying both Call and Put Options – you’ve constructed what’s called a Straddle – with one leg getting a boost from a rally and another leg of the trade ready to profit from a decline.

Such a strategy allows you to make money whether prices go up or go down. What’s the catch you ask? Well, if prices go nowhere, that’s where it’ll hurt, as you have plunked down A$700 (A$0.7 x 1000) for the Call Option and A$1500 (A$1.5 x 1000) for the Put Option. So now your pocket is lighter by A$2200. But with so much volatility in gold it’s hard to see prices going nowhere between now and the end of the year.

© 2010 CNBC.com