Hedging his bets against stock market fall

Hedging his bets against stock market fall

Business
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Punter looks to shore up some of his stocks against a fall in the market

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Whoop-dee-doo! The share price of Archer Exploration, the emerging graphite and graphene producer on South Australia’s Eyre Peninsula has so far held up pretty well.

Hedging his bets:Punter has a put option on 1000 shares in the Commonwealth Bank. Editorial credit: Shutterstock.com

Hedging his bets:Punter has a put option on 1000 shares in the Commonwealth Bank. Editorial credit: Shutterstock.com

Last time he looked, the shares (ASX code AXE) were around 13c. That means that the free 7.5c options being issued this week are seriously in the money.  The Punter is due to receive 46,540 options.  If he chooses to exercise them all, he would have to spend $3490.50 to buy shares worth $6283.

The options won’t be quoted on the stock market, though, so anyone who did not subscribe to the share purchase plan in November will miss out.  It seems likely, however, that a fair number of investors will choose to exercise their options and grab an instant profit by selling the resulting shares on the open market, which could knock back the AXE price to bargain levels. 

On paper at least, the options have helped to push the total value of his portfolio up to almost $82,000. That’s a heady 17 per cent increase in the past two months alone.  The “Santa rally” has continued well into January and the question has to be how long can it last?

With that in mind, the Punter has taken a deep breath and spent $2190 for a put option on 1000 shares in the Commonwealth Bank. The option (ASX code CBADX8) gives him the right to sell the shares at $78 any time before April 26.

The CBA is the most highly valued bank, its mortgage debt has the lowest risk AAA rating, and its dividend yield at the current price of $80 is still over 5pc.  Who would want to sell them? 

But the price has already slipped to around $80 from a peak of nearly $83 earlier this month.  Household debt in Australia has risen to 200pc of disposable income and the price of houses underpinning that debt has started to fall. The Punter’s CBA option are his hedge against a sharp fall in the stock market.

  • Punter has no financial qualifications and no links to the financial services industry.  He owns shares in a number of companies featured in this column.
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