INVESTORS` OPTIONS TRADING LETTER DECEMBER 2015

INVESTORS’ OPTIONS TRADING LETTER
DECEMBER 2015
Market Review
The S&P/TSX Composite Index ended the month of November at
13,469.83 points, down 153.18 points or about 1.12%.
This strategy combines buying an equal amount of call options and put options
on the same underlying security with the same strike price and expiry date.
It should be noted that the highest level reached this year by the S&P/
TSC Composite Index was 15,524.75 points, versus its lowest level of
12,705.17 points.
The maximum potential profit is unlimited in case of a price upswing and
substantial in case of a downswing. As a result, if the share price fluctuates
sufficiently upward or downward, the gains achieved on one of the two options
can generate a significant profit.
For its part, the VICX Volatility Index fell 11.7% to 17.38 as at November 30,
thereby reflecting related investor optimism. This trend was also confirmed
by the relatively low level of the put-call ratio, which oscillated between 0.34
(11/02/2015) and 0.25 (11/30/2015) during the month of November.
Sun Life Financial (SLF.TO) $43.64 (December 8, 2015)
A Few Highlights!
Select the “Long straddle” strategy and you will get to buy:
Let’s take an example using the trading simulator:
The best-performing sectors this month were the following:
•
•
•
•
•
Non-Cyclical Consumer Goods and Services (+8.32%)
Technologies (+6.88%)
Healthcare/ (+3.28%)
Industrial Products (+1.79%)
Energy (+1.27%)
On the other hand, however, the drop in oil prices pushed certain energy stocks
to historic lows, including Baytex Energy Corp. (BTE.TO), which saw its price
drop by 9.39% on November 12, closing at $5.50 after peaking at $6.15 during
the day.
The Basic Materials sector also experienced a 4.08% downturn during the
month of November.
Faced with the high volatility of certain sectors, investors may consider volatile
options trading strategies, such as the long straddle strategy, allowing them to
take advantage of any significant upward or downward movement of the stock
price or underlying sector.
Cost of strategy (market order, excluding commission fees): $490
(premium amount paid for one (1) contract: 100 X (3.10+1.77))
Breakeven point= strike price +/- premiums paid
In our example: $37.10<breakeven point<$46.90
Maximum gain: unlimited on call options and limited on put options
Maximum loss: premium amount paid: $490
For further information on the long straddle strategy, visit the Guides &
Strategies section of our website at
www.m-x.ca/educ_guides_strat_en.php
Did you know?
Using put and call options can optimize the tax efficiency of your investments?
To sell… or not to sell?
The year-end is approaching, and with it, portfolio rebalancing (calls and puts). Before reorganizing your positions, it is important to consider the
tax implications of your investment decisions.
For further information on the equity options tax regime, consult our guide www.m-x.ca/f_publications_en/brochure_fiscalite_kpmg_en.pdf
Options strategies can be used to maximize the tax repercussions of year-end liquidation sales, thereby preventing the immediate taxation of
potential capital gains or capital income.
A few strategies to consider to:
• Protect unrealized gains and defer the sale (and taxation) of your stocks to the following year with a protective put strategy: you set your
minimum selling price, equal to the strike price, and limit your exposure to the risk of a price drop.
• Deduct potential capital losses in the current year and recover them in the following tax year (in case of a future price upturn), by selling the
stocks and simultaneously purchasing an equivalent number of call options: the call options make it possible to limit losses to the premium
amount paid.
To learn more about the strategies described, visit the Guides & Strategies section of our website at www.m-x.ca/educ_guides_strat_en.php
Generate extra revenue by selling
covered call options!
Options are mainly used for protection purposes, as a market risk
management tool. Some investors benefit from the leverage effect they
offer to take advantage of a price upturn or downturn.
What’s new at Bourse de Montréal?
Bourse de Montréal reached a new overall open interest record on
November 19, 2015 of 6,928,399 contracts.
For further information, click here
Today, we are going to focus on the use of options as a revenue source,
with the covered call writing strategy.
This strategy makes it possible to generate extra revenue on stocks
held in a portfolio, while reducing exposure to risk.
Top 10 Most Active Option Classes (Nov. 2015)
It involves selling one call option contract for each block of 100 shares
held.
The investor generally anticipates a stable or even slightly upward
trajectory of the share price during the shelf life of the options.
1
NAME
SYMBOL
iShares S&P/TSX 60 Index Fund
XIU
XEG
SU
RY
COS
TD
FM
CNQ
BNS
SXO
2
iShares S&P/TSX Capped Energy Index Fund
The premium paid following the sale of the call options adds to the
investor’s potential return, while providing a safety cushion in case of a
sharp decline in the share price.
3
Suncor Energy Inc.
4
Royal Bank of Canada
5
Canadian Oil Sands Trust
In return for this premium revenue, the investor agrees to sell the
underlying shares at the strike price to the holder of the put option, if
the latter so desires.
6
Toronto-Dominion Bank (The)
7
First Quantum Minerals
8
Canadian Natural Resources Limited
9
Bank of Nova Scotia (The)
10
S&P/TSX 60 Index Options
Let’s take the case, for example, of an investor who holds a portfolio
containing 100 XYZ shares, for a total value of $2,000 ($20/share), and
anticipates a moderate increase in the stock over the coming weeks.
In order to increase the overall return of his portfolio, you can sell a
$25 XYZ call option contract, trading at $1.10. He will then receive
a premium amount of $110 (100 X $1.10). It should be noted that this
strategy also allows the investor to predetermine the selling price of his
stocks, which would be equal to the strike price ($25) plus the premium
amount received ($1.10), or $26.10.
The investor’s main motivation is to obtain additional revenue, or
the premium amount paid. As a result, the strategy offers maximum
profitability if the share price equals the strike price at maturity. In this
case, the seller of the call option will not be assigned and the option will
expire without value. In other words, he keeps the premium received and
his shares, and will be able to sell another call option. This additional
revenue also reduces his average cost.
Bourse de Montréal has created a benchmark index, the MX Covered Call
Writers’ Index (symbol MCWX). It is designed to reflect the return on a
portfolio that consists of a long position in the stocks in the iShares
(symbol XIU) and a short position in the XIU close-to-the-money call
options.
MONTHLY
VOLUME
538,140
11,809
113,893
49,065
26,623
55,049
30,936
70,303
49,663
57,933
Announcements
NAME
SYMBOL
ANNOUNCEMENTS
Global Capped Gold
Index Bull Plus
NYMEX Crude Oil Bull Plus
HGU
» Contract Adjustment
HOU
» Contract Adjustment
S&P/TSX 60 Bear Plus
HXD
» Contract Adjustment
NYMEX Natural Gas Bull Plus
HNU
» Contract Adjustment
Blog Posts
TITLE
AUTHOR
» Royal Bank Post Earnings Play
Jason Ayres
For further information, go to www.m-x.ca/indicesmx_mcwx_en.php
To find out more about the covered call writing strategy, consult the
Guides & Strategies section of our website our return calculator for
covered call options to obtain the series of call options likely to generate
the targeted potential total return.
For more informations, contact
Mariame S. Cissé, M.Sc.,
Manager, Business Development, Equity Derivatives
[email protected] or +1 514.787-6674
Weekly Option Volume (Jan. 1 – Nov. 28, 2015)
Equity and ETF Options
YRI
Total Monthly Volume and Open Interest
MFC
CVE
5,000,000
5,000,000
4,000,000
4,000,000
3,000,000
3,000,000
2,000,000
2,000,000
1,000,000
1,000,000
NA
CNQ
SLW
CNR
COS
BB
POT
TCK.B
DGC
BTE
CM
XIU
0
ECA
TOTAL MONTHLY VOLUME
Sept. 15
Aug. 15
July 15
June 15
May 15
Apr. 15
Mar. 15
Jan. 15
CPG
ABX
Feb. 15
0
BNS
OPEN INTEREST
BMO
BCE
G
SU
TD
RY
10,000
0
20,000
30,000
40,000
50,000
60,000
Useful Links
GUIDES
MX INDICES
OTHERS
» Equity derivatives
» S&P/TSX 60 VIX Index (VIXC)
» Options List
» Index derivatives
»M
X Covered Straddle Writers’
Index (MPCX)
» Put/Call Ratios
» Currency derivatives
» Equity options tax regime
»M
X Covered Call
Writers’ Index (MCWX)
Trading Tools
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© 2015 Bourse de Montréal Inc.
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