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| May 2007 |
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| Market News | ||
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No listings scheduled. |
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| The Montréal Exchange recently launched its new blog: “Option Matters”. Mr. Richard N. Croft will be posting interesting comments about the market, options and options strategies. Don't hesitate to leave your comments! Useful link www.optionmatters.ca |
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| Features | ||
| Buying calls vs. buying stocks |
Call options offer an attractive strategy to an investor who is bullish on a stock. This strategy allows to profit from the leverage provided by options, limiting the loss to the call option premium.
Strategy
You feel that MNO Bank shares, which are priced at $16, are undervalued. You do not own any MNO Bank stock but believe the shares will rise over the coming months.
To profit from your forecast, you could buy MNO Bank common stock. Two hundred shares would cost $3,200. Alternatively, six-month call options to buy MNO stock at $17.00 per share are available at a premium per share of $0.75. You decide to buy two MNO OCT 17 call options at a total cost of $150 (i.e., 2 x 100 x $0.75). Considerably less than the cash outlay of buying 200 shares.
Six months later, MNO Bank stock has indeed risen, closing at $20 on October 7. The MNO OCT 17 call options are now selling for a premium of $3. Feeling that MNO Bank stock is not likely to rise further, you decide to sell your two MNO OCT 17 call options for revenues of $600 (2 x 100 x $3).
Result
The resale of the two call options enables you to realize profits of $450 since the options purchased for $150 are resold six months later for $600. Had you instead purchased 200 shares of MNO Bank stock at a price of $3,200, you would have realized profits of $800 as the shares would now be worth $4,000.
Returns on investment are quite different due to the difference in original capital outlays, as the following table illustrates:
| Date and Transaction | Price per share of MNO | Options | Shares |
| April 1: buy two MNO OCT 17 calls at $0.75 or buy 200 shares |
$16.00 | $(150.00) | $(3,200.00) |
| October 7: sell two MNO OCT 17 calls at $3.00 or sell 200 shares |
$20.00 | $600.00 | $4,000.00 |
| Net profit | $400.00 | $800.00 | |
| Return on investment | 266% | 25% |
Had you purchased shares of MNO Bank stock instead of the call options, the rate of return on capital would have been considerably lower. Further, the call option buyer’s risk is limited to the premium paid, regardless of any decline in the market price of the MNO shares.
Click here to see the graph comparing profits and losses from the two strategies.
| Key Statistics | ||
| Contracts | Volume April 2007 |
Volume Jan. – April 2007 |
Volume Jan. – April 2006 |
% Change |
| Equity options | 1,035,498 | 4,013,069 | 3,967,936 | 1.1% |
| ETF options | 55,524 | 216,363 | 263,803 | -18.0% |
| Options on the US dollar |
3,290 | 8,996 | 16,379 | -45.1% |
| Interest rate derivatives | 1,602,654 | 9,547,842 | 7,423,886 | 28.6% |
| Index derivatives | 126,510 | 1,037,254 | 764,613 | 35.7% |
| TOTAL MARKET | 2,823,476 | 14,823,524 | 12,436,617 | 19.2% |
| Contracts | Open Interest April 2007 |
Open Interest April 2006 |
% Change |
| Equity options | 1,455,640 | 1,216,802 | 19.6% |
| ETF options |
102,081 | 100,517 | 1.6% |
| Options on the US dollar |
3,719 | 4,520 | -17.7% |
| Interest rate derivatives | 912,001 | 763,419 | 19.5% |
| Index derivatives | 177,473 | 149,338 | 18.8% |
| TOTAL MARKET | 2,650,914 | 2,234,596 | 18.6% |
| MX Implied Volatility Index (MVX) | ||
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| The MVX Index shows the degree of uncertainty perceived by investors in the stock market. The higher the level of the index, the higher the uncertainty. | ||
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| Canadian Equity Options Market | ||
| Traded volume distribution per sector - April 2007 |
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* Sectors breakdowns are based on the S&P/TSX indices. |
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| June 2007 |
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