BIL brambles industries limited

Michaelmou has a shocker.....

  1. 19 Posts.
    Too much bounce in Brambles' implied volatility 16/09/02

    AFR News - 16.09.02

    John Wasiliev

    Volatility expectations in derivatives markets such as warrants or options are described as "implied volatility" and keeping tabs on them is imperative because there are times when such changes can play a bigger role in pricing than changes in the price of the underlying asset.

    This has been very much the case lately, with several short-dated, end-of-September expiry, out-of-the-money derivatives over Brambles shares.

    For three weeks, Brambles derivatives have traded very erratically. Late last month and at the start of this month, the implied volatility on the most sensitive offerings shot up to twice what is normally seen for Brambles.

    They rose to levels in the high-40s when the Brambles share price fell 16 per cent.

    Disappointment about Brambles' corporate performance and apprehension that the stock could be removed from the London Stock Exchange FTSE 100 Index were two major reasons for the slide.

    But just as quickly as the volatility rose, over a matter of days, so it plunged back to the "more normal" early to mid-20s, catching and severely punishing some unfortunate traders who bought calls at high levels in anticipation of a bounce.

    Even though the bounce actually happened, the prices of their derivatives slumped because of the significant retreat in implied volatility.

    One Melbourne options trader, David Walls, who has a very large open position in Brambles $7.50 September expiry call options, said he was shocked by the movement.

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

    Mr Walls said he had complained to the ASX about possible market manipulation but had been told there was no evidence of this and that the movement came as a result of the high short-term volatility in Brambles, and that this could happen.

    He said he was not satisfied with the answer and planned to take his complaint further.

    Meanwhile, Brambles shares today go ex-dividend which might mean further price pressure, although there has been some good news.

    Late last week, when the FTSE 100 announced its adjustments, Brambles was not among them, meaning that it survived this threat, at least for the time being.

    Another share that goes ex-dividend today is Telstra, and Telstra derivatives were being highlighted late last week 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 that, if this shaped up, Telstra December calls might be worth a look.

    In the warrants market, interest remained last week in S&P/ASX 200 Index puts, both on a day trading and minor position-taking basis.

    Another consideration this week is the end last Friday of the Commonwealth 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.

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