CIBC – Part II
- Posted by Richard Croft on December 10th, 2007 filed in Options Market
You have to think speculative pressure trumped fact and logic, when you view the November performance numbers of shares of Canadian financial institutions. During the month, most of the banks and insurance companies hit 52 week lows. Despite reporting better than expected numbers.
In the end of course, market reaction has less to do with actual numbers. It has everything to with the uncertainty as to potential future write downs. CIBC is a classic case study around how that uncertainty is translated into volatility and option prices.
Shortly after CIBC released their better than expected numbers, the stock jumped to $90 per share. Once analysts dissected the numbers, it became clear – or not – that CIBC was holding US$11 billion in “hedged” exposure to US sub-prime credit.
No one is really sure what “hedged” means in this context. Including CIBC management. What we do know, is that the stock market abhors uncertainty, the options market loves it. Particularly if it has the potential to significantly impact the value of the company. A potential US$11 Billion write down, it is by any measure, significant.
As the market grapples with the enormity of the number, CIBC shares have been shaken and stirred. On Friday, CIBC closed at $79.55. Intraday, the shares traded as high as $81.50 and as low as $79.36. There will be more to come.
Coming full circle, we enter the option market, where traders using near term at-the-money options have pegged CIBC volatility at 40%. Well above other Canadian banks such as BNS whose options are implying 21% volatility and BMO at 28% implied.
A couple of points to consider. If you bought the CIBC December 90 straddle example from last week’s blog, it would have been profitable. So too, would have been the purchase of CIBC puts. Not so good would have been the purchase of CIBC calls, although if you were nimble enough, that too had a profitable exit point.
At this stage, we have an ideal covered call or naked put writing opportunity in CIBC. For covered call writers, buying the shares at $79.55 and writing the January 80 calls at $3.50 (implied 34.69%), the April 80 calls at$5.85 (implied 31.85%) or the July 80 calls at $7.20 (implied 30.14%).
The January calls have a six week return if exercised of 5.19% (return if unchanged at 4.6%), the April calls with a four and a half month return if exercised of 8.54% (return if unchanged at 7.93%) and the July calls with a seven and a half month return if exercised of 10.57% (return if unchanged at 9.95%). All these returns do not include dividends.
Writing the January 80 puts gets you $4.40 (implied 39.24%), the April 80 puts $6.25 (implied 32.45%) and the July 80 puts at $7.55 (implied 30.70%).
February 17th, 2008 at 3:20 pm
Your advice is proving very useful while surfing the web and using the stock markets.
Thank you.
February 17th, 2008 at 12:03 pm
Thanks for your comment “no one knows what ‘hedged’ means in this context.” That’s exactly what I was wondering in the case of US mortgage-backed secrities and hundreds of lenders going under.
February 16th, 2008 at 11:14 am
Walid
You can only write one call option on any one block of 100 shares.
Don’t worry about feeling comfortable! Just look at the called and uncalled returns, check the charts, and make ytour decisions based on what you see.
December 15th, 2007 at 1:09 pm
the covered call strategy,,can you write several calls on a set number of shares or the writer should pick the one tha the feels comfertable writing?
December 11th, 2007 at 2:31 pm
OHH MMYY GOD!!
CIBC is 11 Billion in the Hole???
December 11th, 2007 at 5:23 am
One more question for you Richard.
What do you think of the new TMX? See any positives out of this? I noticed that TSX and MX are currently moving in opposite directions? I guess the market likes this move for Montreal X, but not Toronto X…
DH
December 11th, 2007 at 3:27 am
I like the covered call idea, but i also like playing with puts. I stole this idea from one of your past articles.
Buying a Jan. $76 and selling a Jan. $80 on Dec. 10 allows for you to pick up shares at $78.3/share or gain $1.70/contract if CM stays above $80 or a max loss of $2.30/contract if it goes below $76.
If my math is correct this idea would be good for someone long on CM, but of course covered call writing get’s you that tasty 4.4% dividend.
DH
December 11th, 2007 at 12:56 am
Although the risk/return analysis is magnificent,and will be followed closely over the weeks to come,Do we always have follow stocks showing higher volatility regardless of the quality of the asset itself?in other words why CIBC? why not K or ECA? Bet the price of Oil will hit $100 several times especially after Environment Canada’s calling this winter ‘the coldest in 15 years’!
On another note,The Covered Call Calculator returned some results Today, you can choose to alocate your potential return between Premium return and Capital gain,Try (90% Premium-10% Capital Gain)The result is 4 option Series RIM 07 DEC 110,RIM 07 DEC 105,FMZ 07DEC 98.00 and OIL 07 DEC 15.00,Now if you adjust the Potential Capital Return to 20% you get an extra couple of series SSO 07 DEC 40.00 and IMN 07 DEC 90.00,i’m entering different values in the potential premiun/capital gain return fields,if you try something more sophisticated,,glitch..,so now..40% capital return,,14 option series.
My last test was to reverse the desired return to 90% Capital gain,the result was 15 option series,13 of which will expire on the 22nd and 2 RIM series for January.Applying all that to CM,A very interesting outcome!!
Enter CM,Enter 10% Premium,90% Potential Capital Gain,Select expiry date,all months and sort results by Total Potential Return(which actually sorts returns top-down/Descendingly)and you get CM 07 DEC 85.00,last price 80.84,Total Return $180,of which 23 are premium income 157 are capital gain the 23 looks like bid size 40 Multiplied by bid price 0.60,,not quite sure.
Will figure it out some other time..
Congrats for MX and TSX for joining forces.