AFR Interview, EU Summit & 3 option ideas | Raymond Chan | Finance News Network

AFR Interview, EU Summit & 3 option ideas

by Raymond Chan

It’s been my pleasure to be interviewed by Australian Financial Review. The interview was published on 30/06 which marked the 15th anniversary of the establishment of Hong Kong Special Administrative Region (HKSAR), signalling the handover of Hong Kong administrative right from UK to China. 
 
As we headed for a flat end to the week, our market staged a late rally from Friday 12:30 pm after European leaders emerged from the latest EU summit with news they have agreed to use the continent’s bailout funds to recapitalise its struggling banks.The agreement means that banks can be recapitalised directly without the need for austerity programs. This news caused Dow futures to spike and our market jumped by over 1%. EU President Herman Van Rompuy described the agreement as a "breakthrough" for the eurozone with greater flexibility in the use funds of bailout funds to support the banking system. More importantly, it provided evidence that the deeply divided European nations are bridging their differences and finally working towards a unified solution for the region.
 
Before this announcement, there was little to sway investors one way or the other with most action on our market this week related to company-specific news and events. Major restructures, takeovers and other corporate activity dominated the headlines during the week with a number of significant corporate actions undertaken before the end of the 2011/12 financial year.
 
As shown on table below, it does feel like the “risk on” trades is now back on with Commodity Index, Oil and Copper all up 6% this week after a tough financial year for Australian Share Investors with ASX 200 down 11.1% over past 12 months.
 
David Jones announced it has received unsolicited proposal from UK private equity firm EB Private Equity, for the 100% acquisition of the Company for $1.65bn. Fairfax remained in the spotlight after denying mining mogul Gina Rineheart a seat of the Board, sparking speculation that this may prompt a selldown of her 18.7% holding in the company. News Corporation shares rallied after it confirmed it was considering splitting its business into two separate companies in a restructure that would separate its larger entertainment division from its struggling publishing businesses. And to round out the media trifecta, Seven West Media shares slumped following the departure of larger-than-life CEO David Leckie and proposed replacement by ex-Woodside boss Don Voelte. Not to be outdone, our Resources sector also provided some headlines. Fortescue Metals continued with its campaign to challenge the Federal Government's Minerals Resource Rent Tax in the High Court of Australia. Santos shares slipped as it confirmed a $2.4bn cost blowout to Gladstone LNG project. Meanwhile, St Barbara announced a proposed merger with Allied Gold to establish a combined group with a market capitalisation in excess of $1bn that would produce approximately 435,000 ounce per annum. The Offer for Allied Gold shareholders is at a substantial 89.6% premium to the last closing price.
 
With many share price still depressed following a prolonged period of poor sentiment, we continue to believe that there is compelling value to be found in Australian equities. There is evidence that many in the Australian business community also share our view and we may see an increase in corporate activity in the months ahead 

From our Option Desk, here are the three option ideas for the week:

ETO implied volatilities have decreased post the EU summit at the end of last week.
  
Position One:                Sell NCM July $23.50 Puts at 75 cents (Core Portfolio Stock)
Current Share Price:        $23.68
Research Target Price:        $35.55
 
Gold was up $20 last night, the market seems to be expecting further monetary policy easing from central banks in the next few days/weeks.
 
Position Two:                Buy-Write FMG, Buy stock at $4.90 and Sell FMG July $5.25 Calls at 7 cents
Current Share Price:        $4.90
Research Target Price:        $7.37
 
Last week Twiggy Forrest made a fill or kill bid for 60 million shares at $4.90, he was unsuccessful in his attempt but it is a good sign for the share price.
 
Position Three:        Sell QBE July $13.50 Puts at 21 cents
Current Share Price:        $13.48
Research Target Price:        $14.97
 
The stock has seen some buying in recent days with the 1H claims environment being much less volatile than the previous corresponding period.  Other broker research estimates an insurance margin above 14% appears achievable. 


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