Options Strategy on Telstra

by Raymond Chan

TLS.ASX closed at $3.33 on 6 June 2012. This is a 18 month high for TLS. Stock is expected to go ex-dividend in third week of February.

How can shareholders take advantage of TLS’ strength and earn even more income from it with the use of options strategy?

Before going into the strategy, let’s look at some of the drivers/motivators (or lack of) for the stock in the next 2 months:

1 One of the driver which had been pushing up TLS is its upcoming dividend which is expected  towards 3rd week of February. The impetus for this motivator would not be there from the 2nd week of January, as the 45 day holding period of the stock has lapsed. This 45 day holding period is important for those who intend to buy the stock for the dividend and franking credit, with the objective of selling the stock on the first day it goes ex dividend. Holding less than 45 days will render shareholders foregoing the franking credit. This 45-day motivated buying will cease from week beginning 9 Jan 2012.

2 Next is TLS’s share price. It has reached close to a 18 month  high above the $3.40 level last week. 

3 The third factor about TLS is very important. This is the divergence between the rising share price and falling Implied Volatility (IV) on the stock. This divergence at the moment is stark. The gap/gulf between the two is very wide, ie share price at the top and its IV at the bottom. A similar divergence is seen back in Dec 2009 when TLS was sitting at the then peak of around $3.50 whilst its IV was also at its then bottom range. At the peak then, the IV was at around high of 17, before dropping to early 13 and then rising from there as the stock price came off from the $3.50 top.

Now this time around, we have seen TLS’s IV dropping to a very low reading of mid 11 before Christmas. Since then, the IV has been climbing. As of Friday (6 Jan 2012) it’s IV was at early 18. What about TLS’ share price? It hit a high of $3.42 last week Tuesday.  With the IV climbing from its low and the share price at this high level, it is suggesting to me TLS has hit a peak and is more likely to come off from this level.

4 Last component is options actions on TLS. There are large quantities of calls opened in the first three months of the year. The two largest opened strikes (apart from LEPO) are the $3.20 for both Feb and Jan 2012.

Putting the above together, it’s time to write covered calls on TLS, locking in some premium in addition to the upcoming dividend would serve its shareholders well with enhanced income.

The 23Feb12 $3.21 Calls last traded at 3.5c on Friday. Writing this European call will ensure one’s shares don’t get called away before dividend, whislt earning an extra 3.5c.


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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