Derivatives and Risk

Assignment Preparation Task

This task is designed to help you develop your strategy for your assignment. It is the starting point for the research you will need which will inform your speculative view of the 35 days during which you will operate your option strategy.

Task:

  1. Select one FTSE 100 or FTSE 250 company which you are interested in. This must be a non-bank, non-insurance company.
  2. Company specific factors: Research the company’s fundamentals. That is, the companies past performance. For example, what was the company’s:
    1. Sales Revenue for the past year
    1. Profit for the past year
    1. Earnings per share (EPS) for the past year
    1. Share price for the past year
    1. Price to Earning (PE) ratio for the past year
    1. Price to Book (PB) for the past year
    1. Debt to Equity ratio for the past year
    1. Latest news item?
    1. Is the management stable?

Has the Company performed well?

What are the major company specific events (e.g. Merger or Earnings report) coming up between now and 28th April that could cause a share price change? 

How do you expect the company to perform in the next 2 months based on this information?

  • Industry specific factor: Research the company’s industry fundamentals.
    • How has the industry performed over the past year?
    • How have the company’s industry competitors performed?
    • What are the factors which affect the industry?

Has the industry performed well?

Has your company performed well relative to its rivals?

What are the major industry specific events (e.g. supply of raw materials, demand for goods produced) coming up between now and 28th April that could cause a share price change? 

How do you expect the company to perform in the next 2 months based on this industry specific information?

  • Country specific factor: Research the macroeconomic conditions of the country in which the company conducts most of its business (i.e. where the company’s major income is from)
    • How has the Country performed over the past year?
    • What are the macroeconomic risks with this Country that could affect your company’s share price? E.g. Brexit, Interest Rates, Value of the GBP, etc.

What are the major Country specific events (e.g. Brexit deal, BoE rate decision) coming up between now and 28th April that could cause a share price change? 

How do you expect the company to perform in the next 2 months based on this Country specific information?

How would wider market events effect underlying price (check beta)?

  • Global factor: Research the global factors which affect share price:
  • Geopolitical issues
  • Global business cycle
  • Trade stability

What are the major Global events (e.g. OPEC supply limits? US-China trade tensions, Global change in output (GDP) growth) coming up between now and 28th April that could cause a share price change? 

How do you expect the company to perform in the next 2 months based on these Global factors?

How would wider market events effect underlying price (check beta)?

Following this research:

  1. Are you bullish, bearish or neutral on the share price of your company?
  2. Do you expect high price volatility or low-price volatility?

What would be the best speculative option trading strategy given your expectations?

 BullishNeutralBearish
High VolatilityBull Spread (Calls) Strap Long CallStraddle StrangleBear Spread (Puts) Strip Long Put
Low VolatilityBull Spread (Puts) Short PutButterfly Spread Condor SpreadBear Spread (Calls) Short Call  
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