Market volatility brings rewards

VOLATILITY in the stock market can provide lucrative opportunities for options traders.

An option strategy known as a ‘strangle’ works well in volatile markets as downside risks can be minimised while leveraging the upside.

That is the advice coming from stockbroker DJ Carmichael in its latest market brief.

p Tips on gearing and selecting warrants

Warrant trader SG provides the following advice for investors seeking to capitalise on warrant and option trading.

“Gearing is a measure of the number of underlying shares to which you have exposure when purchasing one warrant. More conservative investors will choose warrants with a lower gearing level.

“The formula to use to work out gearing is: Gearing equals share price/ instalment warrant price”

Regular instalment warrants have a gearing of between 1.5 to 2.0 times.

These warrants suit investors looking to add moderate gearing to their portfolio.

High leverage instalment warrants are those with a gearing of more than two and suit the more aggressive and bullish investors looking for great exposure to the underlying share.

“As the loan amount [ie final instalment] is significantly higher, yields are substantially increased,” SG says.

“Investors seeking to prepay a great amount of interests prior to the end of the financial year are also increasingly attracted to high leveraged instalment warrants.”

An additional aspect worth noting is the elasticity of the product. It is a measure of how quickly a warrant will move. It is the relative percentage change in the warrant’s value for a given percentage change in the price of the underlying share: Elasticity equals gearing times delta

Shareholder returns

WA-listed companies’ share prices fell 3 per cent during the month of June, almost matching the negative performance of the ASX All Ordinaries, which declined 4 per cent. The drop followed a 5 per cent decline in June in the Deloitte WA Index.

Deloitte partner Peter McIver said it capped off a poor year in which the Deloitte WA Index posted a 7 per cent fall over the 12-month financial year 2001-02.

But the poor performance was not enough to wipe away gains from the previous year. WA companies have grown their capitalisation by 19 per cent over the past two fiscal years, adding $6.5 billion to their net worth, while the ASX All Ordinaries decreased 3 per cent during the corresponding period. Around 80 per cent of the best performing companies were in the resource sector.

13-month yield play

ANOTHER strategy worth employing, says DJ Carmichael, is known as the 13-month yield play.

“This strategy only works with investments that go ex-dividend within the next month,” the broker advises in its weekly report.

“Investments are then held for 12 months, implying a total holding period of 13 months and the collection of three dividends.

“An added bonus over the three dividends is that investors only pay capital gains tax on 50 per cent of any gain, as it has been held longer than 12 months.”

Switch to ANZ in strong banking sector

WARRANT trader SG tips Westpac investors to stay in the banking sector but to switch their allegiance to ANZ. SG ranked Westpac as the least preferred of the top four, with its ranking also below St George on their list.

“The banking sector will continue to improve as wider equity markets rebound further, SG says in its daily technical report.

Investors should look to ANZ reaching between $19.50 and $19.80.

“At this stage there is no reason to begin taking profits there as higher levels could easily be reached if equity markets are still improving at this point,” SG says.

“ANZ is our preferred pick in the sector as relative comparison charts on both short and long term timeframes show a likely out performance to all its peers.”


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