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Trade of the Week – LITT Short – CDA

February 23, 2022

Trade of the Week – LITT Short – CDA

Codan Limited (ASX:CDA) is a manufacturer and supplier of radio communications, metal detection, and tracking solutions, headquartered in Adelaide, South Australia. It has recently acquired DTC and Zetron. 

Codan Limited (ASX:CDA) is a manufacturer and supplier of radio communications, metal detection, and tracking solutions, headquartered in Adelaide, South Australia. It has recently acquired DTC and Zetron. DTC is an established radio solutions provider to customers including Military and Special Forces, Intelligence Agencies, Border Control and First Responders. Zetron is a worldwide provider of technology solutions for public safety, federal government, transportation, utilities, natural resources, healthcare, and academic institutions. The stock started trading ex-dividend this morning at the price of $7.56.

This week’s trade of the week is a LITT Short on Codan Limited (ASX:CDA) which was flagged by the IV Complete platform’s trade scanners. The stock currently fulfills the following criteria:

  • The stock has traded to 52 week lows.
  • The ADX is above 20.
  • The current stock price is below the 50 day MA.
  • The 50 day MA is below the 200 day MA.
  • The 50 day MA is sloping downwards.

Source: Implied Volatility

The stock has been trading bearish since mid-2021 as the combined effects of 2 major acquisitions, the COVID pandemic, the semiconductor shortage, and an attempted coup in Sudan affected profitability. While the stock may recover in the future, it has recently broken a series of major support levels around $10.00, $9.50, $8.60 and $8.00. The stock is now trading at levels last seen around July 2020, and also below it’s pre-COVID high.

Why a LITT Short?

A LITT Short is a bearish position which is theta positive and benefits from the relatively high implied 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 (Time) decay erodes the value of the sold position.

Source: Implied Volatility

Enter LITT Short:

Source: Implied Volatility

Our systems suggest a monthly expiry between 30 and 60 days. With April’s expiry 58 days away, you may select April for the expiry month.

To achieve maximum profit, you may hold the LITT Short position to expiry and have the spread expire worthless (with CDA closing below $7.00), allowing you to keep the upfront premium received. If you experience a large bearish move early on, you may consider closing the position before expiry to lock in the profits. Keep in mind the theta decay will accelerate quickly in the last 2 weeks before expiry, as will the likelihood of being assigned on the sold calls on any given day.

Managing the Trade

If the stock price of CDA trades higher and breaks through the 50 Day MA resistance (currently at the $9.00 level), you will manage the bearish position into a bullish position to ride the turnaround.

Close sold call:

Buy CDA $7.00 21 April 2022 Call (A)

Repairing position:

If the stock’s turnaround does not eventuate, and the price starts to fall again, you could repair the position if the following criteria are met:

  • The share price is trading below the recent low (5 days+)
  • The share price is trading below the 50 Day MA again

Re-enter sold call:

Sell CDA $7.00 21 April 2022 Call (A)

You want to make sure that the sold call is still in-the-money (ITM) so you can make some profit in the bearish move. If you choose a new strike price for the sold call, the easiest way to open the position with the correct strike price is to create a ‘LITT Short’ trade again using the options cookbook, then delete the long leg so you only have a sold leg remaining. Read our LITT Short guide here.

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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Please click here to read our full warning.

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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