[GRA 2013 - 2014] Project Finance 2 - Equity Derivatives trading ideas

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Project Finance Equity Equity Options Trade ideas Student: Thu-Phuong Do Professor: Aymeric Kalife (*) In order to analyze the possible scenarios, I use the Black-Scholes pricing formula to obtain the price of option with the following hypotheses: (i) Volatility: Current observed implied volatility, (ii) Risk free- rate: 2.5%

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Transcript of [GRA 2013 - 2014] Project Finance 2 - Equity Derivatives trading ideas

Page 1: [GRA 2013 - 2014] Project Finance 2 - Equity Derivatives trading ideas

Project Finance Equity Equity Options Trade ideas

Student: Thu-Phuong Do

Professor: Aymeric Kalife

(*) In order to analyze the possible scenarios, I use the Black-Scholes pricing formula to obtain the price

of option with the following hypotheses: (i) Volatility: Current observed implied volatility, (ii) Risk free-

rate: 2.5%

Page 2: [GRA 2013 - 2014] Project Finance 2 - Equity Derivatives trading ideas

OPTION TRADE IDEA: 24-FEB-2014

Student: Thu-Phuong DO –

TOTAL SA Call Spread Apr-14 €46-€50

Directional view Earnings are on track. Current stock performance is supported by dividend increase and peaked capex cycle. No unexpected change in forward guidance both on free cash flow and production. There is still 3.8% upside to target price (i.e. €46). Volatility analysis The 3M ATM implied volatility is at its lows since Jan 2014 (slightly above 15%). Though the realized volatile tends to increase, it is still much lower than its recent record high in Aug 2013. Hence, we can benefit from this cheap volatility. Proposed strategy I suggest entering into call spread Apr-14 €46-€50: pay €1.36 to long call Apr-14 €46 and short call Apr-14 €50 for a premium of €0.17 to reduce the cost of strategy. We pay the upfront of €1.19 for this strategy. The expiry of option is structured before the next earning announcement which is supposedly on Apr 25th 2014 to avoid any unexpected sharp stock price movement. This strategy is designed for the investors who share the bullish view on this stock. You can outperform the long position when the stock price is above the break-even level of €46.17. They do not see either near-term sharp fall far under current price or near-term rally. In contrast, should the stock price fluctuate among our desired range, this strategy outperforms long position. Potential risks Major risk will occur if the stock price decline sharply below current level of €46. In this case, you underperform long position by the premium paid to enter into this strategy.

Total SA Stock price

Implied and Realized volatility

Scenario analysis

Page 3: [GRA 2013 - 2014] Project Finance 2 - Equity Derivatives trading ideas

OPTION TRADE IDEA: 24-FEB-2014

Student: Thu-Phuong DO –

AIRBUS GROUP NV Short Put Mar-14 €53

Directional view up 2013 u g BIT xp c b w h c u m g m gu c . Q4 EBIT result which will be announced on 26 Feb 2014 should be up 50 bps YoY. However, that figure is impacted by the one-off charges which are hard to provide any great precision. The target price is still about 14% upside. Volatility analysis The 3M ATM implied volatility has risen to 28%, near its 3-month highs. The realized volatility is also at its highest level from 3 months. In addition, we notice the inverted ATM implied volatility structure: the implied volatility is highest in the very near-term and then decreases. We can take advantage of this rich volatility to consider a sell strategy and capture volatility after earnings announcement. Proposed strategy I suggest writing put Mar-14 €53 and receive the premium of €1.65, which is about 3.1% of the notional value. This strategy is designed for the investors who want to benefit the rich volatility in the near-term. If you do not own stocks, your maximum profit will be the premium. Should the stock price falls below €51.35, you will lose proportionately to the payoffs. If you long Airbus stock, this strategy will provide a better performance than the long position by the premium should the price remain above €53. Potential risks You will suffer substantially loss in such event that the stock price plummets far beyond the current level.

Airbus Stock price

Implied and Realized volatility

Scenario analysis