Online Stockmarket Trading Update

We frequently receive calls from our customers asking what they should be looking for in this market and ways that they can capitalise on the trends emerging from different commodities by using ASX shares and options. We have outlined a couple of different strategies below that we hope will help you, investors and traders, develop strategies to maximise your profits.

Gold
The first commodity we will look at is Gold, which is commonly used in turbulent economic times as a safe haven. This has proved true over the past 18 months, rising from around $US780 in November 2008 to $US930 in May 2009 – a gain of over 19%.

Seasonally the gold market typically declines from April into July before another run up towards the end of the year.

Figure: Gold ($US) Year to Date

We have seen gold advance from $US870 to $US930 (or 8%) in the past three weeks and it appears to be reaching key resistance levels (between $US930 to $US950). We are expecting a pull back, with a retest of the $US890 level quite likely in the near term.

Given that we are expecting a pull back in the gold price in the near term, this strategy is designed for investors that are currently holding gold stocks such as Lihir Gold, Newcrest Mining etc.

Take for example Newcrest Mining (NCM.AX)

Given that you are all savvy investors and you had bought NCM in November last year at around the $22.00 level, with a view to hold it as a long term stock in your portfolio, but would like to generate some extra income from your holding.

NCM is trading around the $29.70 range and closely follows the Gold price, so if we are expecting a pull back in the near term, instead of selling the stock and waiting for it to fall so that a position can be re entered, we can rent it out to someone for the next 2 months, and receive a premium for doing so.

To rent the share out means to sell a call option over the shares. This gives the renter the right, but not the obligation to buy the stock from us on or before a given day, at a set price in return for a premium/rent which is paid to us. If the renter doesn t wish to buy the stock from us at the end of that defined period, the contract is cancelled and we retain the premium/rent money.

So let s say that we are happy to set the contract for the renter to buy the stock from us at $35.00 at the end of July 2009 and for this we will receive $1,080 for every 1000 NCM shares that we hold. If at the end of July 2009 NCM is below $35.00 the contract expires and we retain the $1,080. If the stock is above $35.00 as promised, the renter has the right to buy the shares off us for $35.00 per share, however we still get to keep the rent money. Not a bad deal eh!

This is called a buy write strategy and can be summarized as shown below:

Assuming you had bought NCM in November last year at the $22.00.

Pay off diagram

Crude Oil

The second commodity we will look at is Crude Oil and will use Exchange Traded Options as our instrument.

Seasonally the period from May through to October is typically a stronger period for crude oil. However world demand for oil has been on the decline over the past year and analysts are expecting demand for 2009 to fall the most since 1981. This should provide a head wind for the crude market near term.

Figure: Crude Oil ($US) Year to Date

We have seen crude oil advance from $US44.00 to $US60.00 (or 27%) in the past three weeks and it has reached the profit target for its run up from mid April and appears to be pulling back from these levels. We would expect the $US60 to offer resistance for at least the next four to six weeks, with a retest of the $US50 level quite likely in the near term.

So let s assume that the price of Oil is going to drop from around $US56 down to $US50 or a drop of just over 10%.

Looking at historical data of Oil, we can see that the last time oil was at $US50 was on the 27th April 2009. Woodside Petroleum (WPL.AX) on that day was trading at $37.55 and is currently trading at $42.73 a premium of $5.18. Therefore, with all things being even it could be said that if the price of oil drops to $US50 then WPL should also drop down to the $37.55 range.

The option strategy that we will examine for this example will be a bear put spread, which is a vertical spread strategy, meaning that we will buy a near the money put and sell a lower (out of the money) put with the same expiry.

The net effect of this will lower the cost of the strategy and raise the breakeven price on the trade, as compared to simply buying the put outright.

Let s explore this using WPL as our stock and assuming it closes at the end of June at $37.50.

Pay off diagram

By Tom Boland
Manager Trader Dealer Online