Swap shops with options...WES, WOW

by Raymond Chan

We are going to do a long/short pair trade today.

For those who are holding WES shares, it has risen some 10% since it went ex-dividend on 23 August, whilst WOW is still around the $24 levels.

Though WES has outperformed WOW, but based on the latest quarterly sales report, WES has warned of softening margins for Bunnings, Target and Kmart. More so, based on RBS short-interest screening, short interest in WES has been increasing by 0.3% (31bp) since early Sep.

There is a chance WES will come off from $31.50 level whilst WOW bounces off from the $24 level.

For the potential to sell WES or take some income off the table,
Sell WES Nov $31.20 calls for $1.20

One who is holding 1000 WES, would earn $1200 at the start of the trade.
Otherwise, if assigned to deliver, WES will be sold at a breakeven price of $32.22 ($31.02 + $1.20)

To get entry into WOW shares potentially,
Sell WOW Nov $24.01 put for 50c

Breakeven purchase price for WOW is $23.51
(Need cash reserves for possibility of buying shares)


Possible scenarios:
1) If WES falls and WOW rises as expected and there was no assignments, then combined income of $1.70 is earned

2) If WES does not fall below strike of $31.02 (another 50c from here), then WES shares will sold at the breakeven price ($31.02 + $1.20)

3) If WOW does not rise from $23.90, then investor buys WOW at breakeven of $23.51

4) There are 2 other more complicated possibilities.
WES get sold but WOW rises and not assigned to buy, then WES is sold at $31.02 + $1.70
or
WOW is assigned to be bought, whilst still holding to WES, then WOW is bought at $24.01 - $1.70


In summary, best outcome for income is WES closes below $31.02 and WOW closes above $24.01 at expiry.

Happy Trading!

Disclaimer

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