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Trade Of The Week: LITT Short on CIM

April 21, 2021

Trade Of The Week: LITT Short on CIM

This week’s trade of the week comes from the trading scanner built into the Implied Volatility (Elite) platform. It is a bearish ‘LITT Short’ trade on Cimic Group Ltd (CIM).

This week’s trade of the week comes from the trading scanner built into the Implied Volatility (Elite) platform. It is a bearish ‘LITT Short’ trade on Cimic Group Ltd (CIM).

The stock has been trading at the lowest price since the COVID pullback last year. During this pullback, it only spent 2 days trading below its current level. Prior to 2020, the stock traded at this level in early 2014.

Source: Implied Volatility

The current price of $17.07 is below the 50 day MA ($19.00), and the 200 day MA ($22.07). The 50 Day MA is sloping downward, suggesting a bearish sentiment. The ADX of 33.8 is above 20, which suggests a downward bias in recent price action. IV has jumped in recent days from 28 to 33 which means a credit spread will fetch slightly higher premium in the marketplace.

Why a LITT Short?

The position is a bearish position which is theta positive and benefits from the recent jump in 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 decay erodes value of the position.

 

Source: Implied Volatility

 

Enter LITT Short:

We will select a monthly expiry between 30 and 60 days. With May’s expiry 29 days away, and June’s 59 days away, we will select June for the expiry month.

For maximum profit, you hold the LITT Short position to expiry and have it expire worthless, allowing you to keep the upfront premium received. If you experience a large bearish move early on, you can consider closing the position before expiry. Keep in mind the theta decay will accelerate quickly in the last 2 weeks before expiry.

Managing the Trade

If the stock price of CIM trades higher and breaks through resistance at the $17.35 level and also the 50 Day MA, we will manage the bearish position into a bullish position to ride the turnaround.

Close sold call:

Buy CIM $16.00 17 Jun 21 Call (A)

Repairing position:

If the stock’s turnaround does not eventuate, and the price starts to fall again, we can 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 CIM ‘ITM’ 17 Jun 21 Call (A)

We want to make sure that the sold call is still in-the-money (ITM) so you can make some profit in the bearish move. The easiest way to sell another call 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. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

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.

 


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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