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Trade Of The Week: Iron Condor on Treasury Wine Estates Limited (ASX:TWE)

January 20, 2021

Trade Of The Week: Iron Condor on Treasury Wine Estates Limited (ASX:TWE)

With the Chinese/Australian trade dispute continuing, the Treasury Wine Estates Limited (ASX:TWE) share price has seen a sustained pull back since mid-August 2020. TWE has also experienced an increase in Implied Volatility since the beginning of 2021, jumping from 36 on the 1st of January 2021 to 46 today. However, the stock has continued to trade sideways with the 50 Day MA ($9.39) and 200 Day MA ($9.84) converging around the stock price, and its ADX is near all-time lows at 8.9. The market has been trading mostly within these moving averages since November excluding some notable exceptions.

With the Chinese/Australian trade dispute continuing, the Treasury Wine Estates Limited (ASX:TWE) share price has seen a sustained pull back since mid-August 2020. TWE has also experienced an increase in Implied Volatility since the beginning of 2021, jumping from 36 on the 1st of January 2021 to 46 today. However, the stock has continued to trade sideways with the 50 Day MA ($9.39) and 200 Day MA ($9.84) converging around the stock price, and its ADX is near all-time lows at 8.9. The market has been trading mostly within these moving averages since November excluding some notable exceptions.

 

Source: Implied Volatility

 

  • The market started trading above the 50 Day MA on the 30th of October 2020, and opened above this level on the next trading day.
  • On the 3rd of November 2020, the market broke its new support level at the 50 Day MA.This triggered a sell-off pushing the price below $8 on the 5th of November.
  • The stock quickly recovered, closing above the 50 Day MA on the 10th of November.

 

A similar event occurred soon after, but this time on the upside.

  • The market experienced resistance around the 200 Day MA on the 17th and 18th of November but failed initially to consolidate above this level.
  • On the 24th of November the market broke resistance and 3 trading days later the sellers pushed it below the 200 Day MA and tested the 50 Day MA.
  • The next trading day (30th of November) the market gapped below the 50 Day MA then recovered over the following week, closing on the 50 Day MA on the 7th of December 2020.

 

Basically, the stock was unable to sustain price action above the 200 Day MA or below the 50 Day MA over the mid term.

Since this time the market has continued trading sideways. The stock is currently trading around the 50 Day MA.

The stock has experienced most of the recent price action around the $9.20 to $9.50 ranges since the 7th of December 2020. Looking further back, most price action has been within the $8.75 and $9.60 range since 27th of August 2020.

 

Enter Iron Condor Strategy:

The legs will be European style options to avoid assignment if the price action jumps out of its trading range over the short term to mid term.

We will set the strike price for the sold Call Option at $9.76 which is above TWE’s major resistance level.

We will set the strike for the sold Put Option  at $8.76 which is a major support level.

Protection will be bought at a strike price of $10.51 on the upside and $8.01 on the downside.

For entering this position, a premium of $3160 will be received.

The best outcome is for the position to expire with the ASX:TWE share price between the sold legs ($8.76-$9.76). This will allow you to keep the upfront premium.

The worst outcome is for the position to expire with the share price at $10.51 and above, or $8.01 and below, delivering the maximum loss of $2840.

The strategy breaks even at $8.37 and $10.15 on expiry.

Source: Implied Volatility

 

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, 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. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 

 


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