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Trade Of The Week: Bear Call Spread A2M

July 28, 2021

Trade Of The Week: Bear Call Spread A2M

This week our focus shifts to the A2M as it has failed to continue its upward momentum from recent lows. After a recent bounce above the 200 day MA the stock pulled back and continued its downward trend that it has been for the past year. The 200 day MA has acted as resistance during its plummet over the past year and that will be used as our protection for the trade if A2M rallies against us.

This week our focus shifts to the A2M as it has failed to continue its upward momentum from recent lows. After a recent bounce above the 200 day MA the stock pulled back and continued its downward trend that it has been for the past year. The 200 day MA has acted as resistance during its plummet over the past year and that will be used as our protection for the trade if A2M rallies against us.

Implied Volatility has also increased to 50 from the recent sell off making option premiums higher and a good opportunity to take advantage of the increased value in option pricing.  

Source: Implied Volatility

From a Macroeconomic standpoint potential regulatory changes in China present a problem for A2M as there are fears that the Chinese government may look to favour domestic producers over brands like A2 Milk. These issues may or may not be resolved, casting further doubt. 

With Macroeconomic and technical indicators aligning it presents a good opportunity to enter a bearish trade on A2M.     

Why a Bear Call Spread?

The position is a bearish position which is theta positive and benefits from the recent jump in volatility. It can be successful if one or more of the following happen:

  • The market falls.
  • Volatility drops (and you can buy back the position at a lower cost).
  • Theta decay erodes the value of the position.

Source: Implied Volatility

Enter Bear Call Strategy  

  • The strike prices are set for the previous close for the sold call and the 200 day MA for the bought call. 
  • We set the expiry date to between 20 and 40 days on a monthly expiry, which results in the 19th of August as the expiry date.  


The best outcome is for the position to expire worthless with the A2M price below $6.  This will allow you to keep the upfront premium of $1000 and claim maximum profit.

The worst outcome is for the position to expire with the price at 6.25 and above, or 7175 and below, delivering the maximum loss of $1,500

The strategy breaks even at $6.10 on expiry.

The trade idea is based on holding the position until expiry to receive maximum profit.  There is a good chance that A2M will continue to fall further below the 200 day MA as it has been in a downward trading pattern and failed to make a higher high last rally.  You can and you may choose to close out the position before expiry to lock in any gains resulting from time decay or a decline in Implied Volatility levels. Most time decay will occur in the final week before expiry, however markets may lose liquidity as we approach expiry. 

If you would like some more information on options trading strategies, call 1300 805 795. 

You can also follow this link for a detailed tour of the Implied Volatility platform.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform

We wish you good luck with your trading. Please note, we provide General Advice only and do not take into consideration your own personal circumstances, you must decide if it’s appropriate for you. 

 

All trade pricing based on market prices end of day 27th July 2021.

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice.


General Advice Warning

Any advice provided by Reach Markets including on its website and by its representatives is general advice only and does not consider your objectives, financial situation or needs, and you should consider whether it is appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. If you are thinking about acquiring a financial product, you should consider our Financial Services Guide (FSG) including the Privacy Statement and any relevant Product Disclosure Statement or Prospectus (if one is available) to understand the features, risks and returns associated with the investment.

Please click here to read our full warning.

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