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Trade Of The Week: LITT Long on Woodside Petroleum

November 11, 2020

Trade Of The Week: LITT Long on Woodside Petroleum

As we draw closer to the end of 2020 we are finally seeing the events we have all been waiting for. The US election is over and President-elect Biden is preparing the future direction of his nation and a likely return to normalcy in international relations. Pfizer has developed a 90% effective coronavirus vaccine and we expect a gradual rollout across Australia starting March 2021. This is the quickest a vaccine has ever been created and beat estimates earlier this year of a 12-18 month development timeline.

As we draw closer to the end of 2020 we are finally seeing the events we have all been waiting for. The US election is over and President-elect Biden is preparing the future direction of his nation and a likely return to normalcy in international relations. Pfizer has developed a 90% effective coronavirus vaccine and we expect a gradual rollout across Australia starting March 2021. This is the quickest a vaccine has ever been created and beat estimates earlier this year of a 12-18 month development timeline.

These events have removed large amounts of uncertainty in the marketplace. Implied volatility has fallen from 26.8 pre-election to 18.8 today. The market has rallied and smashed through its previous major resistance level at 6200. The world economy is looking towards the light at the end of the tunnel and positive sentiment is returning to the marketplace and economy.

These are all very good signals for oil.

Today’s trade seeks to take advantage of the good news with a LITT Long trade on Woodside Petroleum (WPL). Oil is a great barometer of global economic health and a major commodity in all developed economies.

WPL is well below its pre-coronavirus price levels and is starting its breakout move. For this trade, we expect the stock will reach $24 per share by its 17th December expiry. 

A LITT Long trade is a bullish trade that benefits from time decay. We will sell a put at the $23.89 level to generate a large upfront premium. We will buy some at-the-money protection at $20.90 in case the market pulls back. While this trade does not suit the typical LITT Long trading rules, we can see evidence of a mini-breakout in the recent price levels, and there is a strong macro story backing this move.

Because we are selling a deep in-the-money put, we will generate a large upfront premium. The max profit is roughly 4x the max loss for this trade, and the breakeven point is very realistic over the next 5 weeks.

If the market hits $24 early, you can lock in your profits by closing down the position. Alternatively you can wait until 17th December 2020 in the hope it expires worthless.

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. Please note, we provide General Advice only. 

Book in for free and join us for the sixth and final session of  the Trading 360 Summit on Tuesday where you’ll gain access to great insights, strategies and tools from some of  the best and brightest on the trading floor.

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.

 

Past performance is not a reliable indicator of future performance.

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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