Paper DJS trade

[markrmau]

Can I please have advice on how you people trade options. I don't want to straddle anything yet though.

For the sake of argument, I think DJS will be $2.10 by 23/3/5.

The $2 call DJS13 is now being offered for 4c. (theoretical ??)

So if I bought them, basicall I would pay $40 per contract, and my risk reward would basically be I win for anything >$2.04.

So if I bought 100 contracts (for $4000), and the share price on 23/3/5 was $2.10, I could sell the contracts back to the MM for about $6000.

Is this the absolute basics????

Can I sell on 23/3/5 or would I have to buy the shares on expiry?

If the option goes ex div, is this already factored into buy price?

 

[DTM]

Can I please have advice on how you people trade options. I don't want to straddle anything yet though.

For the sake of argument, I think DJS will be $2.10 by 23/3/5.

The $2 call DJS13 is now being offered for 4c. (theoretical ??)

So if I bought them, basicall I would pay $40 per contract, and my risk reward would basically be I win for anything >$2.04.

So if I bought 100 contracts (for $4000), and the share price on 23/3/5 was $2.10, I could sell the contracts back to the MM for about $6000.

Is this the absolute basics????

Can I sell on 23/3/5 or would I have to buy the shares on expiry?

If the option goes ex div, is this already factored into buy price?

Hi Mark

All that you've said is correct. Depending on how fast the share price travels over your break even point of $2.04 will dictate how valuable your options become. If the price shoots up pretty quickly, the volatility will give your options more value, so you may be able to sell the options for more. eg If DJS went up to $2.10 tomorrow (20 cents move), you would find that the option would be worth more than 6 cents, maybe even 10 cents +.

Also remember that the closer you get to 23 March, the time value that's factored in becomes less ie you would maybe only get the real value of it ie maybe 4 to 6 cents. The big thing to remember is that once it goes ex-dividend, the price may likely drop, so either exercise your options to receive the dividend before the ex date, or sell it while you have intrinsic value.

If I was in your shoes, I would expect the price to rise to about $2.20 because of the dividend. My strategy from that outlook would be to
1. Buy the $2 call options @ .04
2. When/if the price hits $2.20, I would buy the $2.00 put option hopefully for a minimum amount of 4 cents (to insure my shares).
3. Exercise the call options before it goes ex-dividend to capture dividend income.
4. If after the dividend, the price drops below $2, I would exercise puts and sell my shares at $2. If the price stays above $2, then I would just sell the shares at market price.

Hope this helps.

 

[markrmau]

Thanks for this explanation DTM.

When you say to buy puts, do you mean to protect the real shares I bought in the other thread, or is this a strategy you are suggesting for the dividend strip? Actually I think it goes ex div next month - or are you referring to this months unnanounced 10c special div ?

For my paper trade, I would think of buying NWS 22 puts. Last was .145, but offer seems to be .155 now.

 

[DTM]

Thanks for this explanation DTM.

When you say to buy puts, do you mean to protect the real shares I bought in the other thread, or is this a strategy you are suggesting for the dividend strip? Actually I think it goes ex div next month - or are you referring to this months unnanounced 10c special div ?

For my paper trade, I would think of buying NWS 22 puts. Last was .145, but offer seems to be .155 now.

Yes, puts to protect the real shares. It may mean less profit, but it protects you from the down side.

My reasoning for buying puts after the price goes up when Rozella and co make a dividend play, it will force the price up. Hopefully to $2.20 or higher. This will make the $2 put cheaper. Therefore you end up capturing the dividend at no extra costs hopefully, with an added upside of protection for the shares. Of course if the shaes jump after the dividend, you will make more profit.