My Special Christmas Present

I have closed my BCM position on 2009/12/23 and on the same day and the following day I have purchased share of Pacific Basin (2343) with an average price of $5.35 per share. Which I think is a very good investment opportunity for long term.

Reason for entry:
Actually I have been buying share in 2343 since year 2008 in my own share portfolio. My first purchase was on 2008/08/11 at a price of $9.88 per share. Since then I have continue to increase my position in 2343 during the financial crisis. My current average buy price is around $6.

Fundamental Analysis
Pacific Basin is a company involved with shipping and transport of goods all around the world. The industry had a really bad year last year because of the financial crisis and the fall of BDI index. But to me it give me opportunity to buy this stock close to it net book value of $5.76 per share. Which is a good buy. The stock had fall from a high of $18.70 with it lowest at around $3. The company is very profitable ROE 35% and Net profit margin 24% according to last year annual report. With a current ratio of 4.4 and a very strong balance sheet. A cash to total debt ratio of 1:1.2. Which means if necessary the company should be able to pay off all its debt with its cash.

Technical Analysis
The share had been trending up for more than 6 months. So the overall trend is UP. Recently the share price had drop below the 30 week EMA which mean good value.

Plan
Invest for long term which aim for a price target of $15.35 which equal to around 200% return. In order to take this opportunity I had incurred a small loss from the option position.

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Trading Room
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Close BCM Put Option Position

Recently I have close my position with BCM which result in a net loss of -$0.03. It is not because BCM is not a good company, actually I really don't mind to hold my position until expiry and write some covered call on BCM if I get exercised. The reason for me to close my position at a loss is because there is some good investment opportunity in the share market which I will talk about in my next post. The loss I incurred with this trade is minimum compare to the potential gain I am going to get with this position. Thus I have unlocked my capital from the BCM position to purchase Pacific Basin share. In my point of view, it is ok to take a small loss and go for another trade with very good potential.

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Trading Room
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BCM Put Option Position

The stock 3328 (BCM) closed today at $8.78, by looking at my position I reckon there is 50-50 chance that I will get exercised and buy the stock at $9.00. In case I get exercised, my real buy price will be 9-0.24 (minus the premium from writing option) which is $8.76 per share. I will be happy to buy BCM at that price. If i don't get exercise, I will write some other stock options if opportunity arise. But at this moment I am also considering buying a certain stock with a target of 20% ROI if that stock fall to my price range. If I do so, I might need to buy back my put option at a loss so that I can free up my capital to purchase the share position.

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Trading Room
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Trading with the Trend

Remember the saying, “The trend is your friend” and don’t go against the trend. What it means is if the sharing is trending up, you should only go long by buying the shares, buy a call option or a call warrant or write a put option…etc. If the share is in down trend, you should only go short either by buying a put option or warrant or even start shorting the shares or write a call option…etc. So in summary, never go long when the share is in down trend and never go short when the share is in up trend.

P.S. By going long I mean entering a position which will benefit from appreciation in price. By going short I mean entering into a position which will benefit from decreasing price of the underlying.


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Trading Room
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Down Trend

The opposite of Up Trend is Down Trend, which is define by having successive lower crest and lower trough as shown in the graph above. And by drawing a down trend line connect the crest of price movement, it will give us a better idea of the underlying trend and provide a line of resistance for future price movement. This trend line will become a very useful tool when you start trading shares. An example of this will be for China Mobile (stock code 941), on the three months chart, it is currently in a down trend.

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Up Trend

So how do I define an up trend. To make thing simple, you can identify an uptrend by seeing successive higher crest and higher trough. As you can see on the graph above. To make it more clear, sometime you will be able to draw a trend line connecting the trough. This trend line will give you a clear indication of the trend and provide a good support level for share price in the future.

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Bank of Communications Put Option

I wrote some put options on BCM (stock code 3328) yesterday with a strike price of $9.

Reason for Entry:

Fundamental analysis
I always love banking stock, most of them are very profitable. For BCM it shown consistent earnings and acceptable ROE and Net profit margin both 15% and 30% respectively. Although the dividend yield is not that great only about 1.6% p.a. if I buy the share at $9. But still it is a good company I don't mind buying.

Technical analysis
Over the last 4 months, 3328 has been in a trading range of $9-10. It shown good support at $9. On the weekly chart, the current price is very close to the 30 week EMA which mean relatively good value.

Action: Write to Open BCM PUT DEC 09 with strike $9 and premium of $0.24.
Actually today premium is even better with a range of $0.29-0.32 despite the share price going up. Today will be a even better day to open this position.


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Trading Room
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Esprit Put Option Expired Worthless

Esprit share closed above $50 dollars on our expiry date, therefore my option expired worthless. Good for option writer, as I keep 100% of the premium.

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Trading Room
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Dubai World Crisis Impact on Expiry

With the happening of Dubai World Crisis, which is a pretty big Dubai company having difficulty repaying its debt to its creditors. Causing huge financial impact globally. Yesterday the HSI drop more than 1000 points and it certainly had some impact on my option open positions. I really didn't expect this to happen, I am trying to hold all my position until it expire worthless.

So with my position in SHK, which had a strike of $110, at around 3pm the stock price is really close to my strike price. My first feeling of this Crisis is the impact should last for a few days. And if I get exercised from my SHK position. I will buy SHK at $110 which is the price I am happy to buy before the Dubai World Crisis. Now I am worry if I brought it at $110, the stock is likely to drop below $110 on Monday and it is still too early to tell the bottom. Therefore I have make a decision to close out my position with $0.32 per contract. Which means I still profit but not as much. As with my ESP position, due to some adjustment by the clearing house, my strike was actually lower to $48.8 which the reason I am not sure yet. At 3pm, the stock was trading at $50.5, which mean the chance of getting exercise is quite low. So I leave the ESP position open. And yesterday ESP close above $50, so my ESP position should expire worthless. Still waiting for the confirmation contract.


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Trading Room
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Double Bottom

The opposite of Double Top is Double Bottom. This pattern represents a very potent signal for the share price to go up in the near future. When the first bottom is form, there is a support level established from the bottom so when price reach that support level again, buyer are much more confident to buy that share at that price which cause the share to rise. The Double Top and Double Bottom pattern are two very basic yet useful pattern for share trading in general. You will see it quite often on the share price chart.

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Trading Room
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China Mobile Ltd (Cont.)

The stock (941) had indeed get back into the trading range of $75-80. On the short term, I think this stock will stay in this Channel for a while before it break up or down. The current 3 month trend is a sideway. If my capital allow, I will write some put option if opportunity arise. But currently my capital is locked up with my two open positions.

Regarding my SHK and ESP positions, both has been looking quite good. I hope it will expire worthless. Fingerscross.

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Trading Room
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China Mobile Ltd Option

I have been watching China Mobile stock limited lately. Over the last 2-3 months the stock has been trading in a Channel $75-80 for 2 months until it break down from the support line at $75 around the end of OCT 09. Since then the stock has been trading just below the $75 resistance level. The current 3 months trend for the stock is down plus possible sideway movement. If the stock close above $75 with pick up in volume. It can be a sign that the stock is back to the Channel. I might write some put option at that time.

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Trading Room
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Double Top

As shown above is a pattern call Double Top. It is seen on share price chart as a very potent signal that price is going to go down in the near future. Double Top is form when price was rejected from the recent high (top). People try to sell their share at the 2nd Top because they are afraid that the share price will be rejected from the Top again which trigger a huge sell off. This is the basic psychology behind the double top. So every time you see a double top pattern, there is a high probability that the share price will drop in the near future. Note that I use probability here, cause in the share market there is really no guarantee that the price will go a certain direction after a particular pattern.What this pattern really tell us is the probability of share price going in down is higher.

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Trading Room
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Sun Hung Kai Ltd Put Option

I wrote some Put options for SHK yesterday. With Strike $110, Expiry NOV 09, Premium $1.82

Reason for Entry

Fundamental: SHK is a pretty good company. Actually I had a list of 20 optionable stocks and within this list the company are all profitable and in my opinion is fundamentally sound. SHK is one of them. SHK pay about $2.3 dividend per year and show good earning and current ratio.

Technically: On the weekly chart, the share is close to the 30 week EMA. Which means the share is relatively undervalue. On the daily chart, the share show a good support at $110 level.

So with only 2 weeks to expiry, $1.82 per contact is pretty good premium to have.

Action: Write to open SHK PUT option NOV 09, Strike $110, with a premium of $1.82 per contract.

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Trading Room
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Return on Premium

R.O.P. (Return on Premium) is a marker I create myself in order to measure my performance on writing option. The max value is 100% because the premium received on writing option is all the potential profit you can get from the position. That will happen if you let the option expire worthless. Usually I will close my trade earlier than expiration so that I can remove myself from the risk of getting exercise and also use my capital in other trade. The cut off I use is usually 70%. If I can get a ROP of 70% or higher I will close my position.

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Hang Seng Bank Put Option Position Close

HSB (11) had break it consolidation pattern and rise to around $115 yesterday and the Premium of our HSB $110 Nov 09 Put has drop to around $0.4-0.5 per contract. Which had drop more than 80% from the original $2.68 premium. So I decide it is time to take my profit and buy back the contract with a premium of $0.42 per contract. From today I will include a past performance topic which I will post all the performance of the trade that I have put up in this blog.

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Candlestick Charting

There are two main types of share chart: They are the Bar chart and the Candlestick chart. The candlestick chart is compose of many individual candles. Each candle represents a trading period which can be 1 day, 1 week or 1 month…etc. And similar to the Bar chart, each candle tells us 4 different price information about that share. As shown by the two candles above, the thick part of the candle is called the real body. This shows the range between the opening and closing price. When the body was white in colour, it means the closing price is higher than the opening price. If is it black in colour, it means the closing price is lower than the opening price. The thin lines above and below the body are called wicks or tails or shadows. The tip of the upper wick shows the highest price for the period and the bottom of the lower wick represent the lowest price for the period.

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Esprit Put Option

I opened a new option position with Esprit yesterday. The stock was trading at around $51.50.

Reason for Entry

Fundamental: Esprit is a good company shown stable dividend payment history. If I brought the share at $50 that would approximately a 5%p.a. dividend yield. In my view the company is very profitable with a ROE of about 40% and Net Profit Margin of 16%. Also a very healthy looking balance sheet with current ration of 2.46 and a good cash to debt ratio.

Technically: The stock is touching 30 week EMA on the weekly chart which mean the share price is good value. With EMA point up trend. The three month trend is up, price had just pull back from the recent high.

So when I talked to my broker, I said I would like to write to open X number of put option contract for ESP with strike price of $50, expiry Nov 09 at a premium of $1.5 per contract.

P.S Every time I write a Put option contract, I always had enough cash to cover my exposure in case I get exercise on my position.



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Trading Room
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Important thing about writing option

In my option trade with HSB, I am writing a Put option. As I have said before, for option writer the risk is unlimited. So as a writer, we need to be aware of the risk involve. The worse case scenario for writing put option is when the option was exercise and you will need to have enough money to buy that share at that predetermine strike price. Therefore for every put option I write, I always had enough cash for cover my position if I get exercise. This is called Cash covered Put writing. Which means I have enough cash to cover my exposure. For example, if I write 1 contract of HSB Put option with strike price of $110. And each contract cover 100 shares. Then I will have at least 110*100 = $11000 in my account to cover my position if I get exercised. The option broker will also require you to have some cash to cover margin requirement for the position. So for every stock that I write put option on, it is a stock that I don't mind buying at that certain strike price. I only write put option on stock that I would love to buy. My rule for writing Put option is to always have enough cash to cover my exposure. If I don't have enough cash, i will write less contract or give up the trade all together.


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Trading Room
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Technical Analysis Basic Part 1

Bar chart

Above is the basic component of a bar chart. One bar can represent 1 min, 1 hour, 1 day, 1 week or even 1 month. Depends on the charting preference. So let say above is a bar showing 1 day of trading. The top and bottom of the bar represent the highest and lowest price of the day. With the horizontal line on the left of the bar represent the opening price and the horizontal line on the right represent the closing price of the day. So with a single bar, it already tell us the High, Low, Open, Close price for the whole day.

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Trading Room
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Trading Room

Start from today, I will post any new trade I enter into this blog and all my opening position can be find on the lower left of the page. When I am not posting my trades, I will continue to post education article about the shares market and option. After I have cover the all the basic, I will share with you my trading system and my views on the market. Hope you will learn something and be more and more profitable trading the Hong Kong shares and option market.



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Trading Room
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Hang Seng Bank Put Option

On the left hand side, I have post one of my trade opened last week.

Reason for entry:

1.Fundamentally speaking HSB (stock code 11) is a very good company which has make consistent profit with increasing EPS year from year. It also had a very stable dividend policy. With a current DPS of about $6 per share. If we get exercise on this one, we will be buying the share at $110 with a dividend yield of 5.4%p.a. (better than put it at the banks)

2. Technically HSB show a really good support at $110 and currently close to the 30 week Moving average. Which means it is good value at $110.



When talking to my option broker, I will say I am writing to open HSB put option with strike price of $110, expiry on Nov09, with premium of $2.68.



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Trading Room
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Show me the Money

I know you might be thinking why do I bother talking about the option basic. This is because you need to understand option before you start making money with option trading. I think if you had read through my post, you should have some basic understanding of option. Ok we should get onto with the money stuff. But before we all jump into the share market, there is something you should know a bit. They are call Technical Analysis and Fundamental Analysis. Sounds boring isn't it. But I can tell you in order to make money in the market, it is essential you have some understanding of these two subjects. And the entry of my trading position will be base on both technical and fundamental analysis. Put it simply Technical analysis involve looking at the price chart and indicators. From the chart it will give us some idea where the market will be heading in the future. With Fundamental analysis, it involves looking at company financial statement and how good is the company. Is this a profitable company? We will focus on these two topic on my later post.

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Trading Room
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Buy Call Option Example

Let say we think XYZ stock is going to go up to $100 in 1-2 months time and the current stock price is $88.00 at the beginning of OCT 2009. Instead of buying the stock, I can buy a Call option of XYZ to benefit from the raise in stock price. So we are buying a XYZ Call Option with a strike price of $90.00 and expiry at DEC 2009 for a premium of $4. The benefit of purchasing the option instead of the underlying security is leverage. If we buy the stock for $88 and sell it for $100, we are talking about 13% return on investment (ROI). But if we use $4 to purchase the option and the stock price reach $100 anytime from now to expiry. We can either exercise our right to buy the stock for $90 and sell it to the market for $100. So our ROI will be 100-90-4 = $6 which is 150% return on our initial investment. Or we can also choose to sell our Call option to the market. If the stock is trading at $100, our Call option with a strike price of $90 should have an intrinsic value of $10. Which mean we should be able to sell it for $10 at least excluding time value. And our ROI will be 10-4= $6 which is also 150%.So in this case, we are talking about a ROI of 150% VS 13%. This is the main reason why people would purchase a Call option instead of shares.

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Option Pricing Part 3

Time Value

The time value mainly represent the effective period of an option. The longer the time to expiry the higher the time value. But it is also influence by the following factors:
-- Volatility of the underlying share
-- Interest rate
-- Dividend payment
-- Market expectation

Out of these factors, I will say from personal experience the most important one is volatility. There is two type of volatility: Historical Volatility (HV) and Implied Volatility (IV). HV is a measure of how volatile the stock has been in the past. IV is how the market expects the volatility of a certain stock to be in the future. Therefore IV is much more important than HV since it will influence the current price of the option. So an option with high IV will be more expensive than option with low IV assuming other factors are equal. Most option trader will try to sell the option with high IV (the more expensive one) and buy the option with low IV (the cheaper one).


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Trading Room
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TV Financial Advice

Today on one of the TV financial program, I noticed that the financial expert is recommending a buy for stock with a Buy price at $45, Target at $50 and stop-loss at $42.5 and the reason for entry is a technical breakout. I can’t remember the name of the stock. But I don’t think the name or the nature of the stock matter in this case. What I am thinking is that the financial advice given is not for the majority of the audience. So in that recommendation, we are talking about a target profit of 11% ROI with a stop loss place at 5.5% on our entry price. To me 11% ROI is not a good return to aim for and 2nd thing is the target to stop loss ratio is too close. In this case is 2:1. Which means we will break even if we had 2 losses and 1 win. This ratio should be increase in order to be more profitable on the long run. I heard trader that had 9 losses and 1 win but at the end they still get a profit. This is because their one Wining trade had already covered all the loss from their losing trades. The point I want to make here is in order to be profitable trading shares in the long run. The entry is not that important compare to the exit. Let say there is three ways a share price can go, UP, DOWN or Sideway. So theoretical the probability of the price going up will be about 33%. Let assume your probability of wining is about 30% and loss about 70%. With a high target to stop loss ratio of 5:1. Which means everytime you win, you profit 5 times more than your losing trade. So 1 win will cover 5 losses. In 10 trades, if you win 3 trades, you will be able to cover 15 losses. At the end of 10 trades, with 3 wins and 7 loses you should still be profitable even though you had more losing trade than wining trades.


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Option Pricing Part 2

The intrinsic value for Put option is opposite to Call option. If the share is trading at a lower price than the strike price of a Put option, the option is said to be ITM and has intrinsic value. As the put option taker has the right to sell the share at the higher price than the current market price. The option is said to be OTM if the market price is higher than the strike price.

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Trading Room
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Option Pricing Part 1

The premium of an option can be divided into two parts
1. Intrinsic Value
2. Time Value

The Intrinsic Value is the different between the strike price of an option and the market price of the underlying securities. For example if HSBC OCT 09 $85 Call options are trading at a premium of $5.5 and HSBC shares are trading at $89 per share, the option has an intrinsic value of $4.0. This is because the option taker has the right to buy HSBC at $85 per share which is $4 lower than the market price. Option that has intrinsic value are said to be “In-The-Money” (ITM). When the share price equals the strike price, the call and put option are said to be “At-The-Money” (ATM). And if the HSBC was trading at $84, there will be no intrinsic value with the above option. So if the share price is less than the strike price of the call option, the option is said to be Out-Of-The-Money (OTM).

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Trading Room
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Option Features

There are 5 main components of every option contract. They are
1. Underlying security
2. Contract Size
3. Expiry Date
4. Exercise (Strike) price
5. Premium

The underlying security in our trading is mainly shares. There is a list of optionable stocks on the HKEX website. The contract size for stock option depends on the underlying stock. So for example 1 lot of HSBC share equal to 400 shares, so the contract size for HSBC option will cover 400 shares. The expiry date is the date which all unexercised contract will expire worthless, because all options has a limited life span. The exercise price is the predetermined buying or selling price for the underlying share if the option is exercised. The premium is the price of the option that is trade. For example if the HSBC option premium is $1.00, then the price for buying one contract will be $400.

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Trading Room
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Option Buyer, Seller and Writer

So before I go into example, I want to make a concept clear. We need to think of option as a contract and for a contract there is a buyer and a seller. There is only one type of buyer which is someone who buy the option. On the other hand, there are actually two types of seller. Type 1 is someone who buy the option in the first place and sell it later on. Type 2 is someone who don’t own any option but who is able to create an option contract and sell it to someone else. For Type 2 seller, which we will call writer from now on to save any future confusions. Therefore to “create an option contract” means to “write an option contract”. The risk for option buyer is limited as oppose to the unlimited risk of being an option writer. Sound scary isn’t it. I will show you how to control the risk later.

Option basic

So before we go on with trading, we need to first learn the basic. As I said before, my trading involve a combination of share trading and option trading. So what is Option. Option is a kind of deriviatives from the market. There is two main type of option. A Call option and Put option. So let say we use stock option as an example. The buyer of Call option has the right to buy a certain stock at a specific price within a certain timeframe. The buyer of Put option has the right to sell their certain stock at a specific price within a certain time period. The writer (which is the guy you create this option) of Call option has the obligation to sell a certain stock at a specific price when the buyer exercise his/her right within that timeframe. The writer of Put option has the obligation to buy a certain stock at a specific price when the buyer exercise his/her right within that timeframe. Sound complicated .. I will give more example at a later post...

Hong Kong Stock Options

Let me give you a quick review of my trading system. My trading is a combination of stock and stock options trading. Which means I only trade optionable stock in the Hong Kong stock exchange. First I will use an option to acquire the shares then I will either sell the share directly for capital gain or I will use option to sell my shares. It might sound complicated at first but after you have go through my posting in the future. It will become much more easy to understand.
Happy Trading.

Tradingforreal

"tradingforreal" mean I really do trade for myself and as my site develop further I will include real trades that I made currently on the Hong Kong stock exchange including the reason for entry and exit of the trade. Before I do so, I will also post education material regarding share trading and option trading in order to give beginners some basic understanding of trading in general. Hope you will learn something useful.

Goodday

Goodday everyone, Welcome to my blog. The intention of creating this blog is to share with you my thoughs on trading and my opinion on the market. Hope you will learn something useful from this blog.

Trading Room

First post!!