investor sues broker over brambles strategy

  1. 172 Posts.
    Mark West take note
    the person running a trading site specialising in options claims he cant trade options
    the police have all the details, phone records, emails etc etc.

    "Investor sues broker over Brambles strategy
    Oct 15
    John Wasiliev

    A Melbourne investor is taking action against his broker in the Victorian Supreme Court in a case that could have wide-ranging implications for derivatives sellers and advisers, including financial planners who recommend products such as instalment warrants.

    David Michael Walls alleges his broker, Salomon Smith Barney, should have been aware of his relative inexperience in derivatives, his reliance on his broker's advice and his risk-averse investor profile before buying Brambles Industries exchange traded options on his behalf in August and September last year.

    The transactions, which resulted in a net loss of more than $251,000, happened when the Brambles share price was very volatile. At one stage the shares plunged 16 per cent on disappointment about Brambles's corporate performance and apprehension it might be removed from the London's FTSE 100 index.

    The share price movements were exaggerated in the implied volatility shown by Brambles options.

    During late August and early September 2002, the implied volatility on the most sensitive Brambles offerings shot up to twice their historic level.



    But as volatility rose to the mid-40s levels, over a matter of days it plunged back to the more normal low to mid-20s, catching and severely punishing traders who bought Brambles call options at high volatility levels in anticipation of a share price bounce.

    Even though the share price did rebound, the option prices slumped because of a significant retreat in implied volatility. Watching for volatility shifts - known as volatility crunches - is one of the fundamentals of options trading.

    Walls had a very large open position in Brambles $7.50 September expiry call options.

    Even though the Brambles share price has recovered about 5 per cent from the average $6.95 level when he bought the options in late August, the average 17¢ he paid was worth just 6¢ on Friday, a decline of nearly 65 per cent.

    Experienced options traders know big rises in implied volatility must be monitored closely because there can be times when downward volatility adjustments play a bigger role in pricing than any upward shift in the price of the underlying shares.

    Walls says he was "relatively inexperienced in trading in any derivatives" and that he relied on Salomon Smith Barney for advice about stocks and derivatives.

    He says he told Salomon he wanted income and capital growth from a portfolio of suitable securities.

    He says Salomon began a series of very risky trades in derivatives that were inconsistent with his risk-averse profile.

    "The majority of securities acquired by the defendant were speculative in nature and the defendant failed to implement any risk management strategies which could have preserved the plaintiff's capital, rather than erode it," the claim says.

    Among a long list of things that Salomon allegedly failed to do, the claim says the broker did not apply stop-loss rules, held on to losing trades for too long and substantially added to losing positions and averaged down without any proper technical or fundamental basis.

    The broker also "failed to maximise average profit by cutting winning trades or exiting winning trades too early".

    The writ says Salomon's approach to trading was akin to gambling.

    Salomon Smith Barney Private Clients' defence will not be known until it is filed.

    Brambles shares today go ex-dividend, which might mean further price pressure, although there has been some good news. Late last week, the FTSE 100 announced its adjustments and Brambles wasn't among them.

    Another share that goes ex-dividend today is Telstra. Late last week, Telstra derivatives were being highlighted as offering some strategic opportunities after a sharp fall in volatility.

    ABN Amro suggested the possibility of an options market-sourced squeeze pushing the Telstra price beyond $5 and if that happened the December calls might be worth a look.

    Another consideration this week is the end last Friday of the Commonwealth's Bank's buying of shares to meet its dividend reinvestment plan obligations. There are analysts who say this has provided a floor for CBA shares over the past two weeks. But now the shares are on their own and potentially price vulnerable."

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.