Hedging Your Telstra Position
This week Telstra provided a unique trading opportunity that involved hedging the stock after it recovered its dividend completely, primarily thanks to the Cum-Dividend market. This trade can be thought of as either hedging your existing position or as trying to pick up a second dividend.
There is a method of qualifying for an extra dividend for high dividend-paying stock such as Telstra and by trading the Cum-Dividend stock, generally available up to two days after a stock goes Ex-Div. However this type of trade has capital gains tax implications.
Telstra Trade Setup
Learning from past price action we can see last time Telstra went Ex-div (six months ago), it traded in a 30c range for the following month (refer to the chart below).
FIGURE 1: Telstra Trade Setup
Telstra had a spectacular recovery since going Ex-div, thanks to the Cum Div market where investors can pick up 2 dividends in the same period. Here is the trade we recommended to our clients to hedge their position until they qualified for the Franking Credits (which takes 45 days) or until they thought Telstra had found support. For it to be profitable Telstra needed to pull back and trade down towards this week’s low around $4.50, preferably in the near-term.
To profit from this view we proposed to buy TLSKRX (TLS MINI Short Warrants) at $0.49. This is the equivalent of shorting TLS at $4.63. This was a limit order so we only wanted to trade when the TLS stock price triggers. These warrants give you a near 1-for-1 short exposure on TLS stock with 89% gearing, and has a built in stop loss feature (at $4.85) which helps minimise the trade risk.
Place a stop loss on TLSKRX at $0.33 after trade entry (29% risk on trade). This is the equivalent of $4.79 on the TLS stock. First profit target on TLSKRX at $0.65 (33% reward on trade). This is the equivalent of $4.45 on the TLS stock.
The entry level is indicated in red on the TLS Chart above.
Trade Summary if Target is Hit
FIGURE 2: Profit and Loss Calculations Hedging 10,000 of Telstra Stock
MINI Warrants are a flexible trading instrument that can be used in order to gain leveraged exposure with limited risk, or as we have explained today can be used to hedge your existing portfolio positions.
Since entering the trade Telstra has pulled back towards the $4.50 level as expected, leaving investors in this trade in the comfortable position of having locked in the Telstra stock at $4.63, having already qualified for the dividend.
Alternatively investors have the flexibility of taking profits when they believe that Telstra is starting to find support, otherwise use a trailing stop. If the last Ex-Div trading period is any guide, it will take several trading sessions for a support level to be established.
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Good luck in your investing and please give us a call if you would like assistance in boosting your investment returns.
Investment Adviser D2MX Advisory
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This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.