MarketsFlow portfolio performance web-chat for week ending 2 August, 2019

Hi all, this week’s web chat is now on youtube, subscribe to our channel to get a notification as soon as we upload it!
You can watch or listen to it here: MarketsFlow’s portfolio performance for week ending August 2, 2019 - Thanks! :slightly_smiling_face:

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Many thanks Marie. Interesting times!

@tom_mf, the commentary around the implied volatility was very interesting. Over the last few weeks it seems there hasn’t been a high level of implied vol and so income from writing options has been low. But on the latest call, the market observations seem to be that the implied vol is too high to risk getting involved.

Does this mean there is a set range that Marketsflow will only be interested in, even though implied vol is usually higher than actual vol, hence why writing options is generally profitable?

I think a video (or probably several) on options, writing vs buying and implied volatility would be very useful as most of us retail investors will have had little to no experience of this side of investing.

Hi! JamesWhitt,

Essentially Call Options (the right to buy shares) & Put Options (the right to sell shares) are derivatives, but before they come in to being they have to be “written” by a company, or individual that may not necessarily own the shares, but if they do not own them are willing to take the risk, because if they have written a Put Option they are ultimately responsible for fulfilling the option on expiry.

My understanding is that MF will say simplistically own 10,000 shares in Microsoft, but when the signals from the Platform are to sell the shares, they might “write” 10 x Put Options of a 1000 shares, at or around the prevailing market price say $130, MF then receive a payment for writing the Put Options, which are then traded freely in the market until a pre-set expiry date. As long as MF hold the underlying 10,000 Microsoft share this is termed a "covered option.

Obviously, in this example, if the Market is falling, MF can sell out of the 10,000 Microsoft shares, but take a fee from writing the Put Options as a sort of safety hedging type precaution. If the prevailing market price of Microsoft goes up to $200 then the Put Option may ultimately expire without being exercised i.e. nobody will want the right to sell Microsoft shares at $130 when they are worth $200! Writing Call Options is pretty well the reverse of this.

Hope this helps.

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Apologies - just to clarify a little more on the Microsoft example - if the share price fell to say $120 on expiry - the owner of the Put Option at that point could take up the option to sell 10,000 Microsoft shares to the writer of the Put Option at $130 each.

Thanks @Curious1 for the useful example. It has been a while since I studied options, but I think in your example if MF thought the price of Microsoft was going to fall and the position was covered, they would buy put options rather than write them, otherwise it would increase their losing position and the premium would unlikely cover the loss just from the written put position (ie why would a buyer of puts pay a higher premium than the gain they would stand to make from a falling share price).

Apologies if I’ve misunderstood what you were saying, but the way I see it, if you hold Microsoft but want to hedge your position, you write call options. That way if the share price goes up, you benefit from holding the Microsoft shares, plus the premium from writing calls, but lose out when the owner exercises. If it goes down, you lose out on the underlying shares you are holding, but get all the premium on the calls, because the owner won’t exercise. There are obviously various permutations, writing at different strike prices to what you purchased the stock at; at different premium amounts; and different levels of coverage to lock in guaranteed profit if the market moves your way or reduce losses to a certain amount if it goes against you.

I guess this is one for @tom_mf to answer - is MF writing covered options (ie to hedge) or is MF taking a position to increase cash flow? If options are covered then implied vol won’t matter too much apart from to ensure enough premium is earned to offset share price movements against MF’s underlying position - but too much implied vol wouldn’t be a problem as the premium would be greater on a fully hedged position.

This suggests to me the positions aren’t fully covered, as on the call it was mentioned there was too much implied vol to write many options. This would also fit into a High Growth strategy - eg if you are fully hedging a position you’ll likely have lower growth rather than higher growth.

My understanding is that MF will write Put Options or Call Options and collect the premium for doing so, but will not directly buy and sell Call and Put Options within the Portfolios as they intend to stay risk-averse & not get involved in buying and selling derivatives.

ISA’s are not authorised to purchase Put Options or Call Options, and the difference in performance between say the MF High Growth ISA & GIA High Growth is partially down to not being allowed to even write a Call or Put Option within any ISA Portfolio.

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