Be conservative on WOW with options | Raymond Chan | Finance News Network

Be conservative on WOW with options

by Raymond Chan

WOW has been sold down since providing a guidance of 2-6% growth in FY2012 to the market.

Lower margins and tougher retail environment are realities, but at $25.08 at the moment, how long will it stay at this level?

Moreover, there is a 65c fully franked dividend to be ex'd on 12 Sep.

WOW is known for its defensiveness. For those who want another level of defense, options can help to provide some downside cushion, with the guarantee of 65c dividend.

Options strategy:

Buy 1000 WOW at $25.08

sell 10 Sep $2551 call and

sell 10 Sep $2401 put

For a combined income of 53c per contract ($530 for 10 contracts)

Note: Multiple of 1000 shares with 10 options contracts above can be adjusted accordingly. For contract sizes above, total potential exposure to WOW is 2000 shares. $25,080 now and potentially spending additional $24,001 29 Sep 2011 = $49,081 in total capital required without gearing.

Scenario Analysis:

1) If WOW closes above $2551 on 29 Sep (expiry date), sell 1000 WOW at $2551 realising a capital gain of 43c + dividend of 65c + options income of 53c = $1.61 (6.4% in 29 days, before costs)

2) If WOW closes under $2401 on 29 Sep, buy another 1000 WOW at $24.01. Average purchase price for 2000 WOW is $24.55 (with $650 dividend earned)

3) If WOW closes between $2401 and $2551 on 29 Sep, holds on to 1000 WOW, income earned is 65c dividend + 53c options income = $1.18 (4.7% in 29 days, before costs)

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