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Trading T3 Trading Strategys

Discussion in 'Shares' started by DaveA, 8th Oct, 2007.

  1. DaveA

    DaveA Well-Known Member

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    To start with, does anyone know the date that T3 shares have been listed for 12 months and theirfore original owners can recieve the 50% cgt exemption.

    Anyway, i believe that the share price will go down a fair amount on this day due to people taking profit from a good investment. ( i reckon they will drop around 13-15 cents)

    Because of this i want to hedge my share price with an option so i techincally still recieve the same money (maybe a little less due to the premium) but i can carry to investment until to 50% cgt date. If i wanted to hedge it at $2.90 would i need to purchase a put call like this one? Or is there something else i think i need?

    I would want to cover 3,500 shares. So do i buy 3500 of these or do they come in lots? If someone could give me an idea that would be fantastic

    Cheers
     
  2. crc_error

    crc_error The Rule of 72

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    usually options are traded in lots of 1000, so you would either over protect with 4000 or under protect with 3000.

    Also you need a options account to trade options.. you can't buy them with a normal share account.

    So you would "buy to open 4 $2.90 TLS Dec07 PUT"
     
  3. DaveA

    DaveA Well-Known Member

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    ok thanks, atleast i know i only need four. Say i could buy the one i quoted. What would the cost of the option be (ie would it be 4*$0.10, or 4000*$0.10)

    Im really not to sure.

    this is the comsec brokerage, it seems a bit expensive however i dont mind the cost. For future reference though, would the premium value be the amount i pay for the options, or would it be the amount that im being covered for?

    Ive heard people say you can do this all with CFDs as well, but is one of the main difference between options and CFDs is with CFDs the amount is settled to your account daily? Is either way a better way to handle this?
     
  4. crc_error

    crc_error The Rule of 72

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    I'm not sure how CFD's work, but I don't think CFD's are used as insurance like options can.

    That website gives you a 'fair value' price for options. same as ASX Options prices

    When you call the broker, he can tell you the bid and offer for the option your after, then you would try to buy (or sell) it somewhere in the middle. You would probably have to pay up a little. So if the bid is 8 cents, and the offer is 12 cents you would probably have to pay 10.5 or 11 cents to get the trade through. It would be 11 cents x 1000 for each contract.. and you would get 4 (so 4000 x 11c)

    Yes, options trading is more expensive. I think comsec charge me $35 per trade using commsec professional trader software.

    Problem with a CFD is your potential loss is unlimited, where as with a option your loss is limited to the premium paid. A CFD is essentially buying the stock or selling the stock without owning it.. so eventially you have to buy the stock back from the market to close out the position. With a option, its a right to buy or sell a stock at a agreed price.. you don't have to buy or sell it if the price goes against you.
     
  5. Rod_WA

    Rod_WA Well-Known Member

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    Hi Dave

    If you think they're going to drop 13c or so then why would you be interested in only protecting your 3500 share investment?

    Why not trust your judgement, buy a put option for a larger parcel, and make a bigger gain?;)

    CRC, to cover a 3500 share holding for loss of value, wouldn't you need more than four put contracts, unless they had delta near 1? In other words, if you buy four contracts at-the-money (delta near 0.5) then the rise in option value won't match the fall in share price, so shouldn't you go for maybe six contracts (remember that 13c is only about 5% of the share price, not a 20% correction from hell).

    Or should you buy a deep in-the-money put to keep delta near 1?
     
  6. crc_error

    crc_error The Rule of 72

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    Rod, yes but the delta pritty much goes to 1 once the share price drops below the premium paid. So once the stock price drops below $2.80 in this example, it will be 1:1.

    If you want protection within the $2.80 and 90 range, then you will need to buy in the money. So buy a $3 put which will cost more.

    But to keep things simple, you want to insure your shares for $2.90, the cost to do this is 10 cents, you can always force the other person to buy your shares at $2.90, so you know the cost of doing this is the 10 cents paid. Essentially your getting $2.80 for your shares after costs.

    This is why I suggested he gets 4 contracts, rather than 3. better to get slightly more exposure to cover the cost of delta.

    Tom
     
  7. DaveA

    DaveA Well-Known Member

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    At 13c if the option premium is going to be 11c + the trade price, it might not be worth it.

    I just think it has to have some form of drop because many people bought it for the yield (until they have to pay the installment). Now the yield has gone they will try to cash out, but they will wait for the date for 50% cgt. I said 13c as its a bit lower than the average marginal tax rate (30%).

    If i buy a contract (lets say 11c) so thats $110+56=$165

    If the shares fall 13c, that would be 1000*.13 = 130.

    So id actually be behind.

    If the current price is $2.91 and the option is 10c per unit for a sale price of $2.90 i dont really understand the extra cost (is it just like a 5% insurance premium?). SHould i be trying to hedge it at a higher price (ie buying a 3.20 option, or is that going to cost me 40cents each share i try to hedge?)
     
  8. crc_error

    crc_error The Rule of 72

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    Your not understanding it correctly.

    If you buy the put option today for 10 cents, and tomorrow the stock falls 13 cents, the put will be worth the 10 cents + 13 cents = 20 cents.. However as someone mentioned, the delta of that option is 0.5 so realistically the option would be worth about 17 cents.

    The option has time decay, and it has 2 months worth of time value in it.. the 10 cents will decay over the next 2 months.. Think of it as paying interest on the holding.

    If you want more direct exposure to the fall, you would buy the put in the money.. say get a $3 or $3.20 (what ever the next price steps are). Hence you will get the money you paid, (less the amount of time you held the option for) plus the amount of the stock fall..
     
  9. crc_error

    crc_error The Rule of 72

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    The other option is you can get a option with say 1 or 2 weeks to go, if your sure the stock will fall on a given date.. buy the put the day before.. a $2.90 october put might only cost 2-3 cents.. and will have a higher delta, pritty much reflecting the whole stock price movement down.
     
  10. handyandy

    handyandy Well-Known Member

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    Hi Dave

    Info as per
    http://www.invested.com.au/79/telstra-t3-information-4318/


    Presently there is a 11cent premium in the TSLCA's which obviously will be lost at some point.

    There is still another dividend to be paid before the final installment is due.

    So if you have the mathematical skills you should be able to work out what the next dividend is worth as this will reflect the premium.

    I suspect that ones the final divy is paid (feb '08) the TSLCA and TSL will line up perfectly with the $1.60 final payment as the difference.

    Cheers

    PS I have just been looking at the Divies and the potential divy at Feb 08 could be 14cents plus the imputation, so could still have some potential.
     
    Last edited by a moderator: 8th Oct, 2007
  11. DaveJ

    DaveJ Well-Known Member

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    Why not go the other way?

    If you think it is going to drop then you could always 'write'(sell) a CALL option at $2.90 instead. This way if the stock rises above $2.90 at the expiry date of the option you will have to sell it at $2.90(that is the limited profit) or if it is below $2.90 at expiry then you will receive the premium and keep the shares.

    The Dec(expires 20Dec07) $2.90 Call option is around $0.18 ($180 per contract)

    Its basically a 'covered-write' or Covered-call... Do a search, much has been said before about this.

    DaveJ
     
  12. crc_error

    crc_error The Rule of 72

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    I don't believe Telstra shares pay a decent covered call premium.. I have been writing covered calls on some stock over the last 12 months and have done very well..
     
  13. AsxBroker

    AsxBroker Well-Known Member

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    Hi Dave,

    A CFD is more similar to a futures contract than an option as you can't walk away from the futures contract (you have to cough up more than you original paid for). (CMC Markets Australia - Home)

    The main difference between CFDs and options/futures is that CFDs don't actually have a maturity date. Though like all margin products you have to pay interest (you do on options and futures though this is more commonly known as time value, which of course decays to nil at the maturity date of the option/future).

    If you want to get rid of an option before maturity you have to close it out by reversing the position, so if you bought a TLS NOV 07 call at $3.00 you either sell a TLS NOV 07 call at $3.00 or buy a TLS NOV 07 put at $3.00 which both would close out your open position.

    You can use CFDs for insurance/hedging but like CRC said they can have unlimited exposure like futures contracts.

    DaveJ's suggest of writing a covered call is a bit more risque as you might lose your 3,500 units for the sake of picking up a small option premium.

    Just to amuse CRC, I handed in an assignment today in where a client wanted to find out more about CFDs and whether you could invest in them long term as an alternative to investing in shares. If the client is happy to leverage and see it being marked-to-market everyday (same as ETOs) yeah, its cool, personally I wouldn't be doing it myself but it is possible. I'm sure it would cause more headaches to calculate taxable income when doing a tax return.

    Good luck,

    Dan

    PS Don't believe anything I say. Speak to a stockbroker before doing anything.
     
  14. handyandy

    handyandy Well-Known Member

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    Hi Guys

    Is there actually an option available for TLSCA? I can't seem to find any.

    Cheers
     
  15. DaveJ

    DaveJ Well-Known Member

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    Exactly how does buying a PUT option close out a long CALL option? That would turn it into a Straddle not close out the position??

    I wouldn't call it risque... It was mentioned that there was a risk of losing $0.13 around the 12 month time frame. It was also mentioned that the TLSCA position was probably going to be closed to get the 12 month CGT concession. This trade would achieve both if you were happy with the $2.90 price (in this example)...

    Its just another strategy. Honestly TLS (& TLSCA) is not the best share to trade options, the volatility is just not there. And for 3-4 contracts its probably not worth the effort.

    DaveJ
     
  16. AsxBroker

    AsxBroker Well-Known Member

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    Sorry Dave, Yes it does make a nice sharp "V" shape which is a straddle. It was late at night ;)

    I think a gross yield of 4.4% on sellling the call is a bit risque if the price rises about the strike price for the premium. There are many other stocks which have much better volatility and better yields to trade if you are so inclined.

    Cheers,

    Dan
     
  17. DaveA

    DaveA Well-Known Member

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    Thanks Dave

    This is the way im not thinking of swinging, It looks like unless im trying to hedge for a large swing (10% +) its not really worth all the effort. Theres not huge amounts on the line however i basically wanted to lock in todays price but for sale in just over a month.

    The asset will be sold in a month to fund part of my PPOR settlement funds, so i want to be fairly sure about the amount to recieve. I may just sell now and take the Capital gain hit but it basically means ill lose $400 in paying extra tax....

    As for CFDs, wouldnt i still have unlimited exposure even though i own the asset? As long as one is falling the other will be rising, or is this what you mean about alpha not being 1?
     
  18. AsxBroker

    AsxBroker Well-Known Member

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    Hi DaveA,

    If you want to lock in a sale price probably best to buy a put option and if you don't want to use it in a month or whenever you can let it expire and you only lose your premium.

    Options let you walk away if you choose (hence the name "option") though it depends on the equal opposite leg because the counterparty might not want you to walk away!

    I think your getting your greeks mixed up, Alpha is what a fund manager add in "skill" (stock market outperformance, ie, beating the index).

    Delta is the option's sensitivity to changes in the underlying asset (Delta hedging example - ASX).

    There are many other greeks including beta (for stocks sensitivity to the market) and other greeks for options (Option 'Greeks' - Overview).

    If your not confused yet, your doing very well :)

    Cheers,

    Dan

    PS Speak to a stockbroker before doing anything! This is not advice to buy, sell or hold options.
     
  19. DaveA

    DaveA Well-Known Member

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    However i was reading, if you make a profitable trade in the option, it can be easier to just sell the option (realise the gain) and sell the stock (realise a loss) which should be close to being equal for a net 0 position.

    This is rather than waiting for the option to expire and then trade it. However yes this is only happen when the stock is below the strike price. If its above you just let it expire and lose the premium amount

    So for the people who hedge with options on all their shares, do they do it any differently (changing the topic into more informative now rather than just the just the issue). Do the purchase the longest period away option, or do they do the exercise every 3 months buying the next quarters expirying opinion (to limit the premium paid?)