trading equity derivatives tuesday, 9 april 2013 presenter: shaun van den berg : head of client...
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Trading Equity Derivatives Trading Equity Derivatives
Tuesday, 9 April 2013Tuesday, 9 April 2013
Presenter: Shaun van den BergPresenter: Shaun van den Berg
: Head of Client Education at PSG Online: Head of Client Education at PSG Online
• Introduction to Equity Derivatives– Terminology– Examples of Long & Short trades
• Single Stock Futures (SSF)– Equity SSF– List of SSF contracts available– Index Futures (ALSI & ALMI)
• Contracts for Difference (CFD)• What are CFDs?• List of CFD available
• Summary
• Conclusion
AgendaAgenda
Presenter: Shaun van den Berg
• Equity Derivative - Derives its value on underlying share e.g. ANG, BIL, SOL
• Top 100 JSE listed shares• “Go Long” – Rising prices • “Go Short” – Falling prices• “Long Only” – No Scrip available for shorting • Initial Margin – ± 15% deposit • Variation Margin – Unrealised profits & losses
– Processed daily (Mark-to-Market (M-t-M)– Cash account negative – Margin Call
• You must deposit variation margin / close out the contract. • Gearing or Leverage – Borrowing funds
– For each cent the share moves in your favour, you are multiplying the profits by up to 10 times.
– Gearing magnifies your returns.
Terminology Terminology
• Open a position – Long position – Buying– Short position - Selling
• Close a position – Do the opposite trade– Sell if you hold a long position – Buy if you hold a short position
• Roll a position (SSF)– The automatic closing & re-opening – Next dated expiry contract – Same underlying instrument.
Terminology Terminology
Investor / Trader MatrixInvestor / Trader Matrix
PrudentPrudentHigh Reward / Low RiskHigh Reward / Low Risk
SpeculativeSpeculativeLow Reward / High Risk Low Reward / High Risk
AggressiveAggressiveHigh Reward / High RiskHigh Reward / High Risk
ConservativeConservativeLow Reward / Low RiskLow Reward / Low Risk
REWARD
HighHigh
LowLow HighHigh
LowLow
RISK
Example of a Long TradeExample of a Long Trade
Instrument: CFD & SSFInstrument: CFD & SSFDirection: Buy / LongDirection: Buy / Long
Entry: 28620cEntry: 28620cTake Profit: 31000cTake Profit: 31000cStop loss:Stop loss: 27700c 27700c
Risk/ Reward: 1:2.58 Risk/ Reward: 1:2.58
Potential Profit:Potential Profit:2380c per share2380c per share8.31% (55.40%)8.31% (55.40%)
*15.00% Initial Margin
R100 000 CapitalR100 000 Capital2% Risk Capital = R20002% Risk Capital = R2000
Stop loss = 920cStop loss = 920c= R2000/ 920c= R2000/ 920c
Position size = 217 sharesPosition size = 217 shares2 SSF contracts2 SSF contracts
Example of a Long TradeExample of a Long Trade
*15.00% Initial Margin
Stoploss Triggered @ Stoploss Triggered @ 27700cps 27700cps
920 cps loss 920 cps loss - 3.21% (-21%)*- 3.21% (-21%)*
Example of a Long TradeExample of a Long Trade
Instrument: CFD & SSFInstrument: CFD & SSFDirection: Buy / LongDirection: Buy / Long
Entry: 38000cEntry: 38000cTake Profit: 39600cTake Profit: 39600cStop loss:Stop loss: 37500c 37500c
Potential Risk:Potential Risk:500c per share500c per sharePotential Profit:Potential Profit:1600c per share1600c per share
Risk/ Reward: 1:3.2 Risk/ Reward: 1:3.2 4.21% (28.06%)*4.21% (28.06%)*
*15.00% Initial Margin
R100 000 CapitalR100 000 Capital2% Risk Capital = R20002% Risk Capital = R2000
Stop loss = 500cStop loss = 500c= R2000/ 500c= R2000/ 500c
Position size = 400 sharesPosition size = 400 shares4 SSF contracts4 SSF contracts
Example of a Long TradeExample of a Long Trade
Example of a Short TradeExample of a Short Trade
Instrument: SSF onlyInstrument: SSF onlyDirection: Sell / ShortDirection: Sell / Short
Entry: 19300cEntry: 19300cTake Profit: 17800cTake Profit: 17800cStop loss:Stop loss: 19900c 19900c
Risk/ Reward: 1:2.50 Risk/ Reward: 1:2.50
Potential Profit:Potential Profit:1500c per share1500c per share7.77% (92.59%)*7.77% (92.59%)*
*R1620 Initial Margin
R100 000 CapitalR100 000 Capital2% Risk Capital = R20002% Risk Capital = R2000
Stop loss = 600cStop loss = 600c= R2000/ 600c= R2000/ 600c
Position size = 333 sharesPosition size = 333 shares3 SSF contracts3 SSF contracts
Example of a Short TradeExample of a Short Trade
Revised TPRevised TPClosed @ 18520cClosed @ 18520c
780cps780cps4.04% (48.14%)*4.04% (48.14%)*
2013/04/032013/04/03Low @ 18135cLow @ 18135c
1165c per share1165c per share6.03% (71.91%)*6.03% (71.91%)*
*R1620 Initial Margin
Example of a Short TradeExample of a Short Trade
Instrument: SSF onlyInstrument: SSF onlyDirection: Sell / ShortDirection: Sell / Short
Entry: 49345cEntry: 49345cTake Profit: 47718cTake Profit: 47718cStop loss:Stop loss: 49975c 49975c
Potential Risk:Potential Risk:630c per share630c per sharePotential Profit:Potential Profit:1627c per share1627c per share
Risk/ Reward: 1:2.58 Risk/ Reward: 1:2.58 3.29% (42.36%)*3.29% (42.36%)*
*R3840 Initial Margin
R100 000 CapitalR100 000 Capital2% Risk Capital = R20002% Risk Capital = R2000
Stop loss = 630cStop loss = 630c= R2000/ 600c= R2000/ 600c
Position size = 317.46 Position size = 317.46 shares (CFD)shares (CFD)
3 SSF contracts3 SSF contracts
Example of a Short TradeExample of a Short Trade
2013/04/092013/04/09Low @ 48577cLow @ 48577c768c per share768c per share1.55% (10.33%)1.55% (10.33%)
• Watch List (Top 100 shares) / Fundamentals– Top 40 shares / Mid cap shares– Mining & Resources / Financials / Industrials
• Technical Analysis– Price charts (Candlesticks) / 50 & 200-day Moving Average– Trend lines / Support & Resistance / Fibonacci retracement levels– Chart Patterns– Stochastic & RSI indicators
• Trading platform– Mobility (Trade anywhere) / Place orders after hours– Direct Market Access (DMA) / Price Alerts & Stop Orders
• Risk & Money Management – Stoploss – Position Size
Trading ToolsTrading Tools
Single Stock Futures (SSFs)Single Stock Futures (SSFs)
Presenter: Shaun van den BergPresenter: Shaun van den Berg
• Regulated by the JSE
• A standardised contract – Standard quantity (100 shares)
• Expiry Date – Expires on the third Thursday of every quarter
• March, June, September & December.
• Initial Margin – ± 15% deposit
• Gearing ± 6 times• Variation Margin – Adverse price movement
Equity SSFEquity SSF
Presenter: Shaun van den Berg
SSF Contracts AvailableSSF Contracts Available
• Brokerage - Charged at 0.4% (ex VAT) - Value of the transaction. • Market Makers Fee – Charged at 0.1% (excluding VAT).
– The total brokerage charge is 0.57% (including VAT).
• Booking Fee - R60 is charged per SSF contract – You pay only for the opening leg of all transactions
– Only once per day per SSF contract.
– If you buy a Sasol SSF10 times on one day; you only pay R60 once.
• Rollover Cost – 0.25% of Exposure• Interest Payable
– Interest paid on the SSF cost value
– Determined daily by the market maker
– Ruling SAFEX rates.
• Interest Received – Initial Margin – SAFEX less 2%
– Cash balances - Rate linked to the JSE Trustees rate
Trading CostsTrading Costs
Presenter: Shaun van den Berg
Comparable to EquitiesComparable to Equities
INVESTOR A (Share Trader)INVESTOR A (Share Trader) INVESTOR B (SSFs Trader)INVESTOR B (SSFs Trader)
Confident that Sasol shares Confident that Sasol shares will increase.will increase.
Confident that Sasol shares Confident that Sasol shares will increase.will increase.
She has R35 000 She has R35 000 which she can invest.which she can invest.
Sasol’s share price is R350,Sasol’s share price is R350,therefore she buys 100 shares.therefore she buys 100 shares.
3 months later the price has 3 months later the price has increased by 10% increased by 10%
so she sells her shares to so she sells her shares to make a make a R3 500 profitR3 500 profit. .
Her Her returnreturn on her on her investment is investment is 10%.10%.
The The initial margininitial margin set by the set by the broker is broker is R6 000R6 000 which which
is paid by the buyer.is paid by the buyer.
Sasol’s share price is R350,Sasol’s share price is R350,therefore she buys 1 contract.therefore she buys 1 contract.
After 3 months the price has After 3 months the price has increased by 10% & the investor increased by 10% & the investor
closes out his closes out his position & sells out of theposition & sells out of the
Sasol SSF contract.Sasol SSF contract.
His His profit is R3 500profit is R3 500 but his return on his but his return on his investment is investment is 58%.58%.
• Events initiated by a listed company - Affects share price. • Typically agreed upon by board & authorised by the shareholders. • Processed onto SSF contracts by the JSE (SAFEX) • Owners of SSF positions will not be prejudiced by movements in
the underlying instruments. • Examples include:
– Name changes - No direct financial impact on shareholders. – Rights Issues– Unbundling or Spin-offs– Mergers & Acquisitions– Consolidations = R1 share consolidated 1: 10 = R10– Share splits – Indirect impact - Increased liquidity - Price rises.
• R100 share split 10:1 = R10
– Dividends – Have direct financial impact on the shareholders.
Corporate ActionsCorporate Actions
Presenter: Shaun van den Berg
• Dividends Expected in any quarter– Priced into SSFs – Includes expected interest to be received on dividend payment.
• Traders do not receive dividends as a cash payment even though they do benefit from them.
Dividend Neutral Contracts Dividend Neutral Contracts
• Long Trades – N-contract = R100– Q-contract = R95 plus
interest– Plus F-Contract = R5
• Short Trades – N-contract = R100– Q-contract = R95 plus
interest– Less F-Contract = R5
DividendDividendR5R5
SSF Price SSF Price R95R95
SSF Trading PlatformSSF Trading Platform
New Order (Margin)New Order (Margin)
Step 1:Step 1:Click Click New New
OrderOrder
Step 2:Step 2:Enter Enter
Code & Code & GoGo
New Order (SSF)New Order (SSF)
Step 4:Step 4:Select Select SideSide
Step 5:Step 5:Enter Enter
ContractsContracts
Step 6:Step 6:Enter Enter
Price in Price in centscents
Step 3:Step 3:Select Select OrderOrder
Step 7:Step 7:Click Click
SubmitSubmit
Price Watch & Stop OrderPrice Watch & Stop Order
Step 1:Click New
Order
Step 2:Step 2:Select Select Price Price WatchWatch
Step 3:Step 3:Above Above
or or BelowBelow
Step 4:Step 4:Enter Enter PricePrice
Step 5:Step 5:Select Select CloseClose
Step 6:Step 6:Enter Enter
ContractsContracts
Step 7:Step 7:Enter Enter Price Price
Step 8:Step 8:Click Click
SubmitSubmit
Note: SSF Price Watch & Stop OrderNote: SSF Price Watch & Stop Order
• The Price Watch AND the Stop Order have to be used together to execute a trade.– Otherwise, a Price Alert just sends an email or
SMS to you.
• The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached.
Presenter: Shaun van den Berg
Hedging using SSFHedging using SSF
Equity PositionEquity Position+ 500 NPN+ 500 NPN
SSF PositionSSF Position-5 NPN contracts-5 NPN contracts
Share Price: Share Price: -R50-R50
Share Price:Share Price:-R50-R50
Loss:Loss:500 x R50 500 x R50 = -R25 000= -R25 000
Profit:Profit:500 x R50500 x R50
= +R25 000= +R25 000
• Capital Efficient• Low trading costs• Hedge your current
portfolio• Trading Platform
– DMA– After hours– Stops
Pro’s & Con’s of Trading SSFsPro’s & Con’s of Trading SSFs
Advantages Disadvantages
• Interest Payable• Quarterly Rolling Fee• Dividend Neutral• Gearing & Risk • No voting rights
Presenter: Shaun van den Berg
Trading Index Futures (ALSI & ALMI)Trading Index Futures (ALSI & ALMI)
Presenter: Shaun van den BergPresenter: Shaun van den Berg
• ALSI futures are a futures contract based on the Top 40 index• Go Long - Buy the index & Sell later (Make money as prices rise).• Go Short - Sell the index & Buy back later (Falling prices).• High liquidity – Very popular• Cheap – R25 (including VAT) per ALSI index futures contract traded.
– No booking fee.• Tight spreads – The difference between bids & offers are narrow.• Every index point is worth R10 (100 point move = R1 000 profit or
loss) • Initial Margin
– Trade at the index price
– Pay an initial margin as set per SAFEX plus the PSG Online variation margin (currently R29 250).
• Profits or Losses - Depends on where you exit the trade based on the R10 per point value.
• Expiry Date – No rollover (Closeout)
ALSI Index FutureALSI Index Future
ALSI Index FutureALSI Index Future
±200 Points
• Mini version of the ALSI futures (10%)• Liquidity – Improving• Spreads - Improving• Market Maker - As there is a market maker this index
will track the ALSI futures.• Every index point is worth R1 • Initial Margin required is a tenth of the ALSI futures
margin or R2 925. • R5 (including VAT) is charged per ALMI contract traded. • No booking fee• Expiry Date – No rollover (Closeout)
ALMI Index FutureALMI Index Future
Presenter: Shaun van den Berg
• Trading SSFs offers a new dimension– Long & Short trades– Hedge & Speculate
• Gearing – Attractive to small trader– Equity SSF - Swing trader - Top 100 shares
- Minimum outlay & cost– ALSI Index futures - Serious day trader
• Regulated by the JSE– Counter party risk
Summary: SSFSummary: SSF
Presenter: Shaun van den Berg
Contracts for Difference (CFD)Contracts for Difference (CFD)
Presenter: Shaun van den Berg
• Contracts for difference (CFDs) are contracts … – Two parties (i.e. client & PSG Online)– Settled at the close of the contract – Difference between opening & closing price.
• Derivative - It derives its value on an underlying share e.g. ANG, BIL, SOL
• “Go Long & Short” – Up or down• “Long Only” – No Scrip available for shorting • Top 100 JSE listed shares• Initial Margin
– 15% on Top 40 – 17.5% on next 60
• Variation Margin – “Top-up” - Adverse price movement
What are CFDs?What are CFDs?
Presenter: Shaun van den Berg
• You do not have to pay the full price of the underlying shares.
• You only pay enough money to cover the initial margin or deposit into your account.
• You may only need R15 000 to purchase CFDs up to a value of R100 000.
• If your position rises to R115 000 (15% rise), you will in fact make a 100% return on your trade, as you only deposited R15 000 initially.
Geared ProductGeared Product
CFD versus Equities (Margin)CFD versus Equities (Margin)
CFD Trade CFD Trade Equity TradeEquity TradeDetails Details
InstrumentInstrument
ExposureExposure
Price (Cents)Price (Cents)
Initial Margin 15%Initial Margin 15%
500 ABC shares500 ABC shares 500 ABC shares500 ABC shares
6000c6000c 6000c6000c
R30 000R30 000 R30 000R30 000
R4 500R4 500
R5 250R5 250Initial Margin 17.5%Initial Margin 17.5% R30 000R30 000
R30 000R30 000
Presenter: Shaun van den Berg
• Minimum Cost Value - Each new CFD position opened needs to have a minimum cost value of R25 000– R3 750 (15%) initial margin on a Top 40 shares – R4375 (17.5%) initial margin for Top 41-100 shares.
• Brokerage – Commission is 0.4% (excluding VAT). – Open to negotiate brokerage rates for active traders.
• Interest – Interest is charged on the total value of the open position at SAFEX +2%. – This is usually equal to around Prime -2%.
• Scrip Lending Fee – A fee of 1.5% per annum is charged for short positions– Charged per day on open positions– Minimum of R250 per position.
• Financing at competitive rates (CFD) – Current borrowing rate 7.00% (± Prime –2%)
Trading CostsTrading Costs
CFD versus Equities (Costs)CFD versus Equities (Costs)
CFD Trade CFD Trade Equity TradeEquity TradeDetails Details
InstrumentInstrument
ExposureExposure
Brokerage CostBrokerage Cost
STT & STRATESTT & STRATE
Price (Cents)Price (Cents)
% of Exposure % of Exposure
Total CostsTotal Costs
14% VAT14% VAT
500 ABC shares500 ABC shares 500 ABC shares500 ABC shares
6000c6000c 6000c6000c
R30 000R30 000 R30 000R30 000
NoneNone
R120.00R120.00
R85.92R85.92
R37.45R37.45R16.80R16.80
R136.80R136.80 R390.87R390.87
0.46%0.46% 1.30%1.30%
R267.50R267.50
Presenter: Shaun van den Berg
• Regulated by JSE/FSB• Exchanged traded product• Expiry Date= Rollover costs• Set principle amount• Interest agreed upfront• Wholesale interest rates• Best execution• Free markets• Transparent• Guaranteed by SAFCOM• No dividend paid/received• Can take physical delivery
Comparison between SSFs &CFDsComparison between SSFs &CFDs
SSF CFD
• Unregulated• Trades OTC• No Expiry Date• Principle amount could change• Interest fluctuates daily• Retail interest rates• No best execution obligation• Captive markets• Opaque• Not guaranteed by SAFCOM• Manufactured dividends• Never physical delivered
Source: www.jse.co.zaPresenter: Shaun van den Berg
CFD Trading PlatformCFD Trading Platform
CFD AvailableCFD Available
New Order (Margin)New Order (Margin)
Step 1:Step 1:Click Click New New
OrderOrder
Step 2:Step 2:Enter Enter
Code & Code & GoGo
New OrderNew Order
Step 4:Step 4:Select Select SideSide
Step 5:Step 5:Enter Enter
QuantityQuantity
Step 6:Step 6:Enter Enter
Price in Price in centscents
Step 3:Step 3:Select Select OrderOrder
Step 7:Step 7:Click Click
SubmitSubmit
• Buy 300 AVI shares @ 5529c• Exposure = R16 587.00• Initial Margin Required =
– 17.5% x R 16 587 = R2 902.72• Gearing = 5.71 times
– R16 587 / R2 902.72• Brokerage = R16 587 x 0.4% = R66.34
– Equity trade = 0.9% = R149.28 (Minimum R98)• 14% VAT = R9.28 = Total R75.62• Interest on Cost: SAFEX rate 4.73% +2% = 6.73%
– R16 587 x 6.73% = R1116.30 /365= R3.05 per day• Interest on Initial Margin: SAFEX 4.73%-2% = 2.73%
– R2902.72 x 2.73% p.a. = R79.24 / 365 = 0.21 cents per day.
Trading CFDTrading CFD
Price Watch & Stop OrderPrice Watch & Stop Order
Step 1:Click New
Order
Step 2:Step 2:Select Select Price Price WatchWatch
Step 3:Step 3:Above Above
or or BelowBelow
Step 4:Step 4:Enter Enter PricePrice
Step 5:Step 5:Select Select CloseClose
Step 6:Step 6:Enter Enter
ContractsContracts
Step 7:Step 7:Enter Enter Price Price
Step 8:Step 8:Click Click
SubmitSubmit
Note: CFD Price Watch & Stop OrderNote: CFD Price Watch & Stop Order
• The Price Watch AND the Stop Order have to be used together to execute a trade. – Otherwise, a Price Alert just sends an email or
SMS to you.
• The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached.
Presenter: Shaun van den Berg
• Capital Efficient – No fixed quantities (R25 000)
• Low trading costs• No expiry date
– No rollover costs
– Save the annual 1% expense
– Ideal for the Position Trader.
• Hedge your current portfolio?
• All the benefits– Capital growth & Dividend income
• Trading Platform– After hours
– Stops
Pro’s & Con’s of Trading CFDsPro’s & Con’s of Trading CFDs
Advantages Disadvantages• High minimum trade
values• Scrip lending fees• Gearing & Risk • No voting rights
Presenter: Shaun van den Berg
• Review the PowerPoint presentation• Read info available on PSG Online website
• Geared positions - Capital Efficient / More affordable
• Open SSF & CFD account (R1-Million) • Getting Started: Trading Equity Derivatives
– Do your homework (Product knowledge)– Paper trade– Start small – Gain confidence
• Remember: Risk & Money management– Control emotions…
Summary & ConclusionSummary & Conclusion
Presenter: Shaun van den Berg
Finally ….Finally ….
Source: http://business-fundas.com/2010/how-do-stock-markets-work/