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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Sunday, September 20, 2020

Derivatives Idea: Microsoft 3 Month Accumulator with Partial Knock Out

by Century Financial in Investment Insights

Derivatives Idea: Microsoft 3 Month Accumulator...
Microsoft 3 Month Accumulator with Partial Knock Out

*This performance is only observed with historical backtests and not traded by the company.

Risks & Assumptions
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The proposed strategy idea includes derivatives & is a high risk product. The concept is based on options strategies whose net payoff values are based on the option strikes and their corresponding market values. Kindly consult Century Staff for further details & clarifications on the same.
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The strategy has 5 legs which involve simultaneous buying & selling of options at predetermined strikes. The possible result of its application has been illustrated below.
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Calculation for net payoff is based on market prices quoted on Bloomberg at the time of structure creation. Going ahead, the option prices may change based on the underlying price movement.
Rationale

With broader risk markets & tech stocks showing signs of correction, chances of further intervention by US FED cannot be ruled out. USA presidential elections and other end of the year corporate events will likely see market volatility coming to full force once again. One of the key beneficiaries of the FED liquidity and rise in retail investing through online trading platforms has been tech sector stocks. Although the recent correction in the tech sector is primarily on account of huge unwinding in the large options positions, their dominance over the US indices is here to stay.

The strategy involves accumulation of MFST stock via call buys within range of $190 - $250 with Knock Out @ $260 levels. On strategy level, profits start accruing above KO price zone of $260. The net cost for this strategy is $3.11 (1.5%). With partial Knock Out, this would allow the clients to run profits on further gains if the MFST stock price rises above $260 level.

Advantage over normal stock buy & hold position

At a stock price of $265, the strategy may provide additional gains of 6% over a normal buy & hold position. The illustrated gains are incremental in nature above the Knock-Out price. In the scenario where MSFT prices touch $300 level, the strategy has the potential to provide additional gains of 40 % over normal buy & hold position. Above the Knock Out levels of $ 260, there is potential average gains of 50 % above the normal stock buy & hold position. On the downside, in case of drop in MFST prices below $200, the strategy has the potential to save $8.89 /share from the overall loss. In price range of $190 - $250 (accumulation range), the strategy may be having a loss of $4.95/share over a normal buy & hold position.

MSFT 3 Month Accumulator with Partial KO
Underlying Duration CMP Strike Partial Knock Out Strike Price Partial Knock Out Price Legs Structure Price Range Considered Exposure/Leg Max Profit Max Loss
Microsoft (MSFT) 3 Month (18 Dec, 2020 Expiry) $202 94% 129% $190 $260 5 $70 - $330 1 Lot (100 shares) $19,689 $12,311
3 month MSFT Accumulator

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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