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
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!


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

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