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Trade Of The Week: Buy Write – CBA

August 3, 2022

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Trade Of The Week: Buy Write – CBA

Reporting season is starting this week, which can be a volatile time in the stock market. The biggest consumer bank, Commonwealth Bank, is expected to report next Wednesday, 10th August. With rising interest rates and changing economic conditions, earnings reports will reflect the resilience of the management and quality of business.

Reporting season is starting this week, which can be a volatile time in the stock market. The biggest consumer bank, Commonwealth Bank, is expected to report next Wednesday, 10th August. With rising interest rates and changing economic conditions, earnings reports will reflect the resilience of the management and quality of business.

Out of the Big 4 consumer banks, CBA historically has been the best-performing pick and greatest managed in changing market conditions. Backing the strength of the business, we’ve selected a Buy Write strategy on Commbank to consider this week, meaning buying stock of CBA and selling a Call Option against our stock, allowing us to collect some cost of the purchase back through the premium received.

This is a strategy suited for investors who are bullish on CBA stock, but also want to leverage their position to generate income. The timing of this trade plays in line with the upcoming dividend expected to be paid shortly after reporting, for those interested in profit distribution income.

Source: Implied Volatility

Technically, CBA has traded sideways since May 2021, with highs of $110 and lows of $87 during that period. More recently, the stock broke both the 50-day MA and 200-day MA on the upside after a strong performance since mid June.

We see support for this stock at $100, the 200-day MA (also at $100) and 50-day MA ($96). Resistance we’re seeing at $106 followed by all-time highs of $110.

Source: Implied Volatility

The benefit of covered call strategies is the optionality and flexibility it provides depending on how you manage the trade.

Scenario 1:

Commonwealth Bank trades below the strike price of your sold call option and the option expires worthless. Investors keep the premium initially received initiating the trade and keep the CBA shares. There’s then a possibility to sell another call option on your share position and receive further premium in compensation.

Scenario 2:

The shares trade and finish above the strike price of your sold call option at the expiry, meaning that you’re obligated to sell your CBA shares at the strike price. Traders would profit from the difference between your buy price and strike price (multiplied by the number of shares owned) plus sold call premium received. Relative to this timing a dividend distribution would also be calculated in investment return.

Scenario 3:

Say we’re approaching option expiry and CBA shares are trading higher than the strike price but you want to keep your position, investors can consider to roll the call option out (increasing the time on the contract) receiving further premium. This would especially make sense if CBA is approaching all-time-high prices and think resistance could impact the run.

For further information on using the Implied Volatility platform you can follow this link, here.

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, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

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. From 5 October 2021, under Design and Distribution Obligations, anyone opening a trading account will be required to meet the Target Market Determination criteria of Phillip Capital and subject to an assessment the results of which will determine your eligibility for a trading account, for further information please see here.

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Any advice provided by *Reach including on its website and by its representatives is general advice only and does not consider your personal objectives, financial situation or needs, and you should consider whether it’s appropriate for you. This might mean that you need to seek personal advice from a representative authorised to provide personal advice. Please click here https://reachmarkets.com.au/general-advice-warning/ to read our full general advice warning.


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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