MQG - time for a close watch | Raymond Chan | Finance News Network

MQG - time for a close watch

by Raymond Chan


MQG's share price has been falling from a high of $41.95 after its earnings downgrade in early February. At the current price of $36.45 (7 Mar 2011), that is almost a $5.50 fall or 13%. Perhaps the lower earnings is now reflected in the share price?

Based on our chart analysis, there may be another 90c to go. The level to watch is $35.57. If that holds, we will be piling in to the stock.

Why so? Our analyst is still expecting a 15% ROE from MQG within 3 years. What's more exciting is its upcoming dividend, expected to be around $1 early May.

To take advantage of this weakness in the stock and to be positioned for the upcoming dividend, options investors can look to sell April puts.

For those who are conservative, the April $35.50 strike is giving about 84c now, should the stock weakens another 90c, you could be looking at around $1.15 per contract on this strike.

For those who are even more conservative and want downside protection on a volatile stock (may be a wise thing to do anyway), in addition to the trade above (the selling of the April $35.50 put) buy a lower April put for protection as well.

For an investor who is willing to accept a $1.50 maximum downside, then buy the April $34 put for protection and the combined income for these two legs (selling of $35.50 and buying of $34) will still generate about 50c credit income per contract.

Summary:
Sell April $35.50 put and buy April $34 put for a combined credit of $500 per contract.

Exposure is the potential purchase of 1,000 underlying MQG shares at $35 with downside protection to $34.

Those who are only interested in a trade, the maximum exposure is $1.50 per combined trade with the earning of $500 income per bull put spread.

Disclaimer

Information/strategies/trading ideas in this blog is provided for general information purposes only and is not intended as an offer to enter into any transaction. Information contained in this blog is not necessarily complete and its accuracy cannot be guaranteed. Information/strategies/trading ideas here have been prepared without consideration of the investment objectives, financial situation or particular needs of any individual investor. Before a client/investor/reader makes an investment decision, a client/investor/reader should, with or without RBS Morgans' or the author’s assistance, consider whether any advice contained in this blog is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation. The use of options may not be suitable for all investors. Potential investors are recommended to seek professional advice before embarking on any strategies mentioned in this blog. The information/strategies/trading ideas contained in this blog have been taken from sources believed to be reliable. Neither the author nor RBS Morgans Limited represent that the information is accurate or complete nor should it be relied upon as such. Any opinions expressed reflect the author’s judgment at this date and are subject to change and is not necessarily that of RBS Morgans'. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further, RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this blog and may, as principal or agent, sell such securities. The Directors of RBS Morgans Limited and Grosvenor Sydney office advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client/investor/reader in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. Information in this blog is proprietary to its author and may not be copied as your own or used for any other purpose without the prior written consent of the author. RBS Morgans Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group Principal Office: Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000