Take Advantage of Rising Stocks Using Options

The expectations of greater corporate profits is reflected in the sentiment surrounding the climb in the All-Ordinary composite which appears to be testing weekly resistance levels and poised to break out to all-time highs. Economic performance has rebounded, as the Australian economy grew in the Q4 climbing 1.1% following a 0.5% decline in the Q3. Consumption growth accelerated to 0.9% from 0.4% in the prior quarter. Despite a rebound in retail sales and robust housing data, the RBA kept a dovish tone which should buoy riskier assets such as stocks.

The Reserve Bank of Australia left interest rates unchanged and provided a dovish outlook to market participants. Comments by Governor Lowe described an improving global economy, with a focus on additional spending in China, but he refrained from an upbeat tone when describing the domestic economy in Australia. He noted that low wage growth and soft inflation have followed the end of an Australian investment mining boom.

Rate should remain subdued in the wake of soft Retail sales in Australia, which unexpectedly dropped by 0.1% month over month in February of 2017, compared to a 0.4% climb January in and missing market expectations of a 0.3% increase.

A bright spot for the economy has been in the house space. Building permits in Australia unexpectedly increased 8.3% month over month nearly touching 19K units in February while January was raised higher by 2.2% beating expectations of a 0.5% drop.

Despite a rally in Australian stocks, the ASX has under performed the S&P 500 index by 14% in 2017. This provides the backdrop of additional gains for Australian stocks, as the global economy begins to gain traction.

ASX S&P 500 in April 2017

Trading Ideas

Historical volatility is subdued and hovering near the middle of a 3-month range while implied volatility, which is a critical component of option premium values, is near the lower end of its 52-week range. The put call ratio, which measures the open interest of put options versus the open interest of call options is in the middle of the 2017 range, but has recent perked up reflecting a move by traders to hedge against adverse market changes.

The ASX is likely to continue to grind higher in tandem with global equities as interest rates remain low, forcing investors into riskier assets. To take advantage of this outlook, you could sell a covered call options, or purchase a call spread. A more hedge approach would be to purchase shares and sell a collar, where you would sell an out of the money call and purchase an out of the money put.

Increase in Historical Volatility in 2017