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Trade Of The Week: LITT Short – AGL

January 27, 2021

Trade Of The Week: LITT Short – AGL

The LITT Short trade is a quant designed bearish strategy. You enter this trade when you expect a fall in the price of the underlying before the expiry date. Setting up the trade involves selling an in-the-money call option, and buying at-the-money call option for protection. By selling an in-the-money call, you receive an upfront credit for entering the position. Your best outcome is for the whole position to expire worthless, so you can keep the upfront premium.

The LITT Short trade is a quant designed bearish strategy. You enter this trade when you expect a fall in the price of the underlying before the expiry date.

Setting up the trade involves selling an in-the-money call option, and buying at-the-money call option for protection. By selling an in-the-money call, you receive an upfront credit for entering the position. Your best outcome is for the whole position to expire worthless, so you can keep the upfront premium.

To follow the LITT Trading strategy, you will enter the position when the following criteria have been met:

  • The share price is below the 50 Day MA
  • The 50 Day MA is below the 200 Day MA
  • The 50 Day MA is trending downwards
  • The share price is below the 52 week low
  • The ADX is above 20


AGL has good market maker coverage which means the spreads will be smaller to enter and exit positions.

AGL’s stock price ($11.55) is currently below $15 so you will need to adjust the filter in the upper right corner of the ‘trading scans’ to see this opportunity.

The next ex-dividend date is expected to be after the upcoming expiry date on 18th of February 2021.

Source: Implied Volatility

 

AGL has a history of gapping to the downside – when this stock moves it moves quickly. With competition heating up and margins being squeezed in the retail energy markets, this downward trend could continue for some time The stock has reached new 52 week lows, signalling a continuation of its bearish breakout move.

Source: Implied Volatility

 

Enter LITT Short Strategy:

Sell AGL 11.00 15 Oct 2020 Call (A)
Buy AGL 11.50 15 Oct 2020 Call (A)
Ratio 1:1

Entering this strategy on the 27/1/21 would have generated $33 in upfront premium before brokerage and ASX fees.

The best outcome (maximum profit) is for AGL to trade and expire below $11.00, which will render the contracts worthless on expiry, allowing you to keep the upfront premium of $33.

The worst outcome (maximum loss) is for the stock to trade and expire above $11.50. Your sold call will expire in-the-money, however your bought call will offset any further losses if the price rises above it’s strike price of $11.50, resulting in a maximum loss of $17.

The break even point = $11.33, excluding brokerage and ASX fees.

The great thing about the LITT short trading strategy is that you have room to move if the market turns against you. Based on the LITT trading rules, if the stock experiences enough buying pressure to push through its resistance level at the 50 Day MA, you can manage the trade by closing out the sold call and remain in a long call position. This allows you to profit from the rising share price as it continues to increase. And if the market then reverses and falls below the 50 Day MA again, and trades below recent 5 day lows, you can repair the trade by re-entering the sold call position.

 

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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