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)
