Options trading in OZ - 'Reopening' discussions

[Gunnerguy]

Hi all,
I spent some time on ASF a few years ago, left for a while, but am back now.
I am intending to move into options trading.

I have traded shares/stocks for over 30 years but now want to move in to options as I now have a lot more time on my hands.
I have a grown a large portfolio of Oz Shares/ETF's over the years successfully but want to look at generating some income from the holdings I already have (if possible) and develop some holdings specifically tuned to options trading.

I have spent the last couple of weeks re-reading and re-learning about options and initially want to start slowly and conservatively.

1. I am looking at selling (writing) covered calls on currently held shares that have Capital gains already to start with. My MTR is now at a (very)/insignificant) rate so I am happy to 'risk' the option being executed/closed out. If they don't get executed I'm happy with some form of income.

Once I am comfortable with the above I then may move on to ...

2. Cash covered puts.

I am still (swing) trading shares/ETF's basically on a quarterly basis, and will continue to.

I see that the options boards are rather quiet and not many recent posts, however I hope that with opening this new thread there are some out there who have an interest in options (again) and/or trading them, and are willing to have some discussions, ideas exchanges, around Options.

Gunnerguy.

 

[Sharkman]

occasionally people post stuff about options in the thread for the underlying itself eg. BHP, CBA (well i do anyway) but in general at the moment the options market itself feels rather quiet, especially compared to this time last year. vols appear to be only slightly above the long term averages, skews don't look outlandish, nothing much is moving.

compared to the "excitement" of last year with the violent price movements and skews going haywire making for an environment that encouraged trying options strategies out of the ordinary. during the depths of the crisis i found i could buy 2-3 month 20-25 delta calls in many of the majors at about 40 vol, but there was so much panic floating around that people were willing to pay over 100 vol for the ATM weeklies. so i experimented with some diagonals like that which could be done at basically zero cost, found that it worked pretty well, and kept doing it for a few months. but those days are gone now, options market started calming down around sept from memory and those insane vols disappeared quite quickly.

curious as to why you want to hold off on short puts until you've done covered calls for a while. it's synthetically the same thing. are you waiting to build up the cash to collateralise the short puts first?

 

[Gunnerguy]

Dear All,

With my renewed interest in Options, and an attempt to see if Options can be used against my current share holdings to generate more gains/income, I have started to do some analysis. This is the first of such analysis. With the current climate of ‘the market is over stretched’, ‘PE’s are overextended’, ‘a crash is coming’, and ‘cheap money will keep the market grinding higher’, I thought my first analysis would be a simple one and look at the Options available on an Index and see how they compare to an Index ETF.

This Analysis was conducted in April 29th. 2021, using current Index market data and Options pricing at the close of the market.

Objective : Assess if it is better to invest in the AXJO ETF or an Option with the current possible volatility in the market. How does buying/taking an Index Option call or put compare to simply investing in the Index ETF over various future Index values (rising market and falling market).

Method : Compare the gains of the AXJO Index/EFT with the purchase of a September Call/Put Option. Calculate the payoff profiles of the options to determine the percentage gain/loss of the AX200 is needed to make the AXJO ETF more attractie than the Options.

Results : To those with experience in options this is probably a rather simplistic analysis, however as a ‘student’ of options myself I thought I would do the analysis and share it with others and see if it is correct, and/or of any value to others. I find the results interesting, but not surprising.

Based on current AXJO price and September (5 months ahead) call/put options close to current Index values, it suggests:

1. If the ASX200 rises above 7,325 (+3.0%) by 16/9, it is best to purchase a September Call Option.

2. If the ASX200 falls below 6,800 (-4.0%) by 16/9, it is best to purchase a September Put Option.

3. If the AXJO is between 6,800 and 7,083 on 16/9 it is best to keep your money in your pocket.

4. If the AXJO is between 7,083 and 7,300 on 16th. September it is best to invest in the AXJO ETF.

AXJO	​	Current Vale 7,083
	​
September 16th. 2021	​
	​
Below 6,800	AXJO has fallen more than -4%​	Buy the September 7,100 Put
6,800 – 7,083	AXJO loss between -4% and 0%​	Keep money in your pocket
7,083 – 7,300	AXJO gain between 0% and 3%​	Buy the ETF today
Above 7,300	AXJO has gone up more than +3%​	Buy the September7,100 Call Option

Would be interested in anyone’s comments.

Gunnerguy

 

[Gunnerguy]

Dear All,

Having re read my financial modelling text book and watched several UTube videos on Options trading over the last couple of weeks I am now getting ready to get started with my first Options trade. I hope to place my first trade this week.

Starting simple I plan to place a covered call on a portion of the FMG shares that I hold. I thought I would post my planned trade here in order to see if anyone can see any glaring issues or have any advice on the trade.

Background.

I hold FMG shares purchased on 4th May at an average cost of $22.53. I hold more shares than the shares in the options contract I plan to trade.

The Trade.

Sell 10 contracts (1,000 shares) of a 17th June FMG call with XP of $24.76. The XP is 7.8% above current SP as on 7th May. 1,000 shares from my account will be ‘held’ as collateral for the trade. The premium is $0.470 ($470) per contract and the contract fee is $35. Total received premium will be $470 - $35 = $435.

Possible outcomes.

1. If FMG SP remains below $24.76 up to 17th June the Option will expire and my gain is $435.

2 If FMG SP rises above $24.76 the option will be executed by the purchaser. My shares held as collateral will be sold. At the XP of $24.76, there would be a gain of 9.9% above my original purchase (4th May) cost of the shares ( (24.76-22.53)/22.53 ), plus a share trading fee.

Other thoughts.

I want to hold FMG long term, however I also want to see if I can get some ‘income’ from holding them, in addition to the possible healthy dividend. If the SP rises to $24.76, I am happy to sell and get a gain of 9.9% over the 4 weeks.

I am cognisant that the results and dividend will be announced in Mid/End August so I want to complete the trade before then.

I believe, but not sure, that if the contract expires and is not executed, the premium received will be considered ordinary and assessable income for tax purposes. It is not considered a Capital Gain. If the contract is executed then the proceeds, and costs, and premium are all included in the Capital Gain calculation with no 12 month 50% discount.

Any advice or critical comments would be welcomed. Thanks.

Gunnerguy.

 

[striek]

If you are going to regularly sell options I would strongly consider swapping brokers because Australian brokers are very expensive. $35 a trade (CommSec?) Plus another $35 on assignment will kill your profit profile. I use Interactive Brokers. It's about $1 a trade on options and no assignment fee. They aren't chess sponsored and have other pros/cons though so do your research.

The obvious risk to selling long covered calls is upside risk. You take on all the downside risk but limit your profit potential on the upside. What is your expectations for the performance of the underlying, do you buy back in, what's your opportunity cost?

I am personally long on FMG options and looking to acquire more.

 

[Gunnerguy]

If you are going to regularly sell options I would strongly consider swapping brokers because Australian brokers are very expensive. $35 a trade (CommSec?) Plus another $35 on assignment will kill your profit profile. I use Interactive Brokers. It's about $1 a trade on options and no assignment fee. They aren't chess sponsored and have other pros/cons though so do your research.

The obvious risk to selling long covered calls is upside risk. You take on all the downside risk but limit your profit potential on the upside. What is your expectations for the performance of the underlying, do you buy back in, what's your opportunity cost?

I am personally long on FMG options and looking to acquire more.

Striek
Thank you for you great comments.
Cost of trade is a bit high and will consider other brokers. At the same time this trade I propose is a ‘small’ one to start with.
I am also long FMG, but is executed out at a 10% gain in a month I would be happy with. These 10 contracts are only a portion of my total FMG holding. Plus there are several opportunities in the current market that I think are available.
Opportunity cost - cost of the trade I’d guess, other opportunities, yes always, but I am already not fully invested at the moment.
The purpose is to learn the process of covered calls and the bull spreads to start with to eventually get a yearly income of $100,000, from my currently held holdings on top of the capital growth and dividends.
Thanks for your comments.
Gunnerguy.

 

[over9k]

Are you determined to sell options gunner or is buying them on the table?

 

[Gunnerguy]

Over9k,
Thanks for your question.
The short answer is yes.
The long answer is .....
I am looking to increase my knowledge in options of all types in order to create more income/returns from my current holdings at a risk appropriate level.
I find full in depth detailed financial analysis of potential companies lengthy and time consuming and has risk.
I have done charting also in the past with EW, H&S, defending wedges etc. and this method also has its merits. On parts of my portfolio I do both of these.
I believe options can allow me to reduce downside risk but as others say may reduce my upside.
Protecting the gains I already have rather than selling out and taking my profits is also a target.
Staggering puts and calls in a fluctuating market I believe will also provide some risk appropriate gains and protection.
I need to reduce the cost of contracts to gain full value in options trading, however the size/number of contracts I hope to trade are such that the high cost is annoying but not totally debilitating.

Gunnerguy

 

[cutz]

The Trade.

Sell 10 contracts (1,000 shares) of a 17th June FMG call with XP of $24.76. The XP is 7.8% above current SP as on 7th May. 1,000 shares from my account will be ‘held’ as collateral for the trade. The premium is $0.470 ($470) per contract and the contract fee is $35. Total received premium will be $470 - $35 = $435.

Hi,

Sounds like an ok strategy to begin with.

Not much to say about covered calls, you can roll down into a correction but risk getting assigned in the event of a snap back.

Biggest downside to the covered call strategy is missing out on upside, you seem well aware of that, you're shorting less call options than total stock holding therefore you should be able to trade your way out of assignment in the event of a rally.

FMG stock appears to have good trading volume which should translate into less liquidity risk in the options which means getting filled around the midpoint, watch out for those series which have low volumes on the underlying, market markers will tend to pull you towards their side in order to get a fill.

 

[striek]

Has this mornings price action changed your mind at all? Its very likely if you had sold Friday you would be regretting it today (I would think) when the underlying has almost met your strike price (with a month to go). I regret not buying more call options last week!

I had sold covered calls on A2M... I knew in my head I should cut the stock weeks ago but went with my heart... the covered calls were a compromise to reduce the cost base. Now I have sold out at a loss and purhased puts, haha.

 

[Gunnerguy]

Hi,

Sounds like an ok strategy to begin with.

Not much to say about covered calls, you can roll down into a correction but risk getting assigned in the event of a snap back.

Biggest downside to the covered call strategy is missing out on upside, you seem well aware of that, you're shorting less call options than total stock holding therefore you should be able to trade your way out of assignment in the event of a rally.

FMG stock appears to have good trading volume which should translate into less liquidity risk in the options which means getting filled around the midpoint, watch out for those series which have low volumes on the underlying, market markers will tend to pull you towards their side in order to get a fill.

Cutz,
Thanks fir your comments. Yes I am keeping an eye on the open contracts and the volumes of each strike price and series.
A big move today fir FMG sort I’ll adjust my strategy price should I hit the button this week.
Thanks !
Gunnerguy

 

[Gunnerguy]

Has this mornings price action changed your mind at all? Its very likely if you had sold Friday you would be regretting it today (I would think) when the underlying has almost met your strike price (with a month to go). I regret not buying more call options last week!

I had sold covered calls on A2M... I knew in my head I should cut the stock weeks ago but went with my heart... the covered calls were a compromise to reduce the cost base. Now I have sold out at a loss and purhased puts, haha.

Striek
Huge move today. Haven’t seen such a large one day rise in FMG. With such a move today buying a put about a percentage below current price I don’t think would be too bad an idea.
My covered calls strike prices will have to move up.
Thanks for your comments.
Gunnerguy

 

[Gunnerguy]

All,
My journey in to trading options continues. Little steps.
I have now opened an account with IB and started funding the account.
Having done more reading and research, it seems, not surprising, that liquidity and volatility are important factors in choosing which options to trade. Looking at the ASX website on open interest and liquidity for the last 4 months I see that the following are the most liquid options: XJO, TLS, BHP, FMG, WBC, ANZ, NCM, ORG, RIO, NAB, WES, STO.
Obviously the last 4 months has been reporting season but (again probably obviously) these are generally the larger companies on the ASX.
On volatility, I am unable to find any historical 'implied' volatility for ASX shares anywhere. If anyone knows where I can get this I would appreciate it. I don't fancy the idea of downloading historical closing prices for these shares and using excel to calculate probabilities of dailyy/weekly/monthly volatility statistics, but might be fun for a nerd like me.
Anyway with the list of most liquid options, and the 'Commodity super cycle' apparantly, and the market moving to, possibly, 'value over growth', I think I might focus on the likes of BHP, RIO, WES, as I hold none of these directly (apart from indirectly in ETF's) or possibly STO, FMG as I hold these.

Just an update on my journey .... for people to laugh at, or make critical comments.
But alos, sorry to bore the options trading experts that are here.

Hope you all having a good day.

Gunnerguy.

 

[cutz]

On volatility, I am unable to find any historical 'implied' volatility for ASX shares anywhere. If anyone knows where I can get this I would appreciate it.

Hello.

IB TWS shows it in chart form, just check the option implied volatility box when opening up a stock chart.

To see it in webiress/viewpoint launch a stock chart, append "IV" to the ticker code, example BHPIV.ASX

Regards.

 

[Gunnerguy]

Hello.

IB TWS shows it in chart form, just check the option implied volatility box when opening up a stock chart.

To see it in webiress/viewpoint launch a stock chart, append "IV" to the ticker code, example BHPIV.ASX

Regards.

Thanks Cutz,
I’ve got IB all set up and now have the IV.
Amazinging the technology available now compared to 20 years ago when I traded through Schwab, Fasttrade and ETrade via paper contracts.
The World has opened up for me.
I’m like a kid with a new toy !!

Gunnerguy

 

[Gunnerguy]

My IB account us now fully funded.

Just bought some CBA shares today. My first acquisition to my ‘Trading Options Portfolio’.
I plan to use these firstly to try to gain income by placing covered calls as my first strategy into a fully fledged multiple shares options portfolio.

I plan to add a couple more shares as since I am starting this journey I’m only planning on doing covered calls until I get use to the IB software and gain more knowledge on option trading.

There is heaps of info on trading on the web. The best I have found so far is OptionAlpha. A great website with over 100 hours of detailed option training/trading videos.

Interested in hearing any ideas/comment regarding creating strategies.

Gunnerguy

 

[Sharkman]

buying stock + selling calls is synthetically equivalent to selling puts. in fact when trading thru IB it's actually slightly cheaper to sell puts and have the stock put to you vs buying the stock outright, particularly for dollar expensive stocks like CBA. you only pay 27.5c a contract when assigned, you DON'T pay the 0.08% brokerage. to buy 1000 units outright at today's prices would cost about $77 brokerage, to get those same 1000 units put to you only costs $2.75 as an assignment fee. it's not much individually, but it adds up if you frequently utilise dividend stripping tactics.

CBA doesn't go ex-div until Aug. if the objective is to generate income from both premium + dividend, an alternative way to go about it would be to sell Jun puts. if those expire OTM, then sell Jul puts. if either of those are ITM, you can let them get assigned and take delivery prior to the dividend. if they both expire OTM, then buying outright might become a consideration at that point to ensure you have the stock before it goes ex-div.

if you're going to sell Aug covered calls, watch out for early exercise especially the day before ex-div day - the div can and will get called out from under you if it's ITM and the dividend is larger than the remaining extrinsic. one way to avoid that is to sell the *european* calls (in IB the european chains are denoted by CBA.E instead of CBA) which can't be exercised early, but the premium will of course reflect that. the downside is that you don't always get good fills on the europeans as they are way less liquid. the american options generally get better fills, but you have to pay close attention to the market the day before ex-div and be prepared to buy them back or roll up & out if it looks like it could get exercised early.

 

[Gunnerguy]

buying stock + selling calls is synthetically equivalent to selling puts. in fact when trading thru IB it's actually slightly cheaper to sell puts and have the stock put to you vs buying the stock outright, particularly for dollar expensive stocks like CBA. you only pay 27.5c a contract when assigned, you DON'T pay the 0.08% brokerage. to buy 1000 units outright at today's prices would cost about $77 brokerage, to get those same 1000 units put to you only costs $2.75 as an assignment fee. it's not much individually, but it adds up if you frequently utilise dividend stripping tactics.

CBA doesn't go ex-div until Aug. if the objective is to generate income from both premium + dividend, an alternative way to go about it would be to sell Jun puts. if those expire OTM, then sell Jul puts. if either of those are ITM, you can let them get assigned and take delivery prior to the dividend. if they both expire OTM, then buying outright might become a consideration at that point to ensure you have the stock before it goes ex-div.

if you're going to sell Aug covered calls, watch out for early exercise especially the day before ex-div day - the div can and will get called out from under you if it's ITM and the dividend is larger than the remaining extrinsic. one way to avoid that is to sell the *european* calls (in IB the european chains are denoted by CBA.E instead of CBA) which can't be exercised early, but the premium will of course reflect that. the downside is that you don't always get good fills on the europeans as they are way less liquid. the american options generally get better fills, but you have to pay close attention to the market the day before ex-div and be prepared to buy them back or roll up & out if it looks like it could get exercised early.

@Sharkman
Thanks for making the effort to let us know your ideas !!
As a novice in options this is great. I’m just a bit scared of selling puts without holding the underlying shares at the moment but my confidence will grow in time.
Very simplisticly, I hope to buy a share I believe will do do well in the future. Hold the share and sell calls for the premium. Maybe set the CD at say 10% above current SP. if I get assigned I get 10%, no complaints, if I don’t then I keep the premium.
I’ll study you suggestion.
Thanks again.
BTW, I’m hoping to do this with 3-4 companies, and roll them up.
Gunnerguy

 

[cutz]

As a novice in options this is great. I’m just a bit scared of selling puts without holding the underlying shares at the moment but my confidence will grow in time.

Hello,

In simple terms a covered call carries exactly the same risk profile as a naked put.

Why are you more comfortable buying stock and shorting calls over just shorting puts ?

 

[Gunnerguy]

Hello,

In simple terms a covered call carries exactly the same risk profile as a naked put.

Why are you more comfortable buying stock and shorting calls over just shorting puts ?

Hello,

In simple terms a covered call carries exactly the same risk profile as a naked put.

Why are you more comfortable buying stock and shorting calls over just shorting puts ?

Because as an amateur I feel scared ‘selling’ something I don’t own, plus generally I am ‘long’ on CBA.

Maybe I’m missing something.

Gunnerguy.
(Trying and learning something new, slowly)