Technical analysis
Like

Selecting the Optimal Put Option

Martin Noël
May 29, 2018
506 Views
0 Comments
2 minutes read
Selecting the Optimal Put Option

As the following graph shows, the price of shares in CGI Group Inc. (GIB.A) has reached an all-time high. We can also see that the RSI (Relative Strength Index) indicator and the stochastic oscillator (%K) are both in oversold territory. In the past, this has been followed by corrections that brought the stock price back down as far as the previous cyclical low. Given this history, it is very possible that the stock price could fall to around $75.

Daily Chart for GIB.A ($78.75, Friday, May 25, 2018)

An investor interested in profiting from this scenario could buy put options expiring on August 17, 2018, choosing the strike that would yield the best return if the price reaches $75.00 on expiration.

We will choose one of the following puts:

  • GIB 180817 P 78 at $1.86
  • GIB 180817 P 80 at $2.78
  • GIB 180817 P 82 at $4.05

 

Position

                    Option with the best leverage

As the above table shows, of these three put options, it is GIB 180817 P 80 at $2.78 that has the optimal combination of risk and return, offering a potential return of 79.86% if GIB.A reaches the target price of $75.00 on August 17, 2018. Consequently, we will carry out the following transaction:

  • Purchase of 10 put options, GIB 180817 P 80, at $2.78
    • Debit of $2,780

 

Profit and Loss Profile

Target price on the put options, GIB 180817 P 80 = $5.00 ($80.00 – $75.00)

Potential profit = $2.22 per share, for a total of $2,220

Potential loss = $2.78 per share, or $2,780

 

Intervention

Even though the target price for GIB.A is $75, our potential profit is tied to the $5 target price on the put options. Therefore, as soon as the price of the puts reaches $5, we will liquidate the position, even if GIB.A has not yet reached the target price of $75.

 

Good luck with your trading, and have a good week!

 

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

 

Martin Noël
Martin Noël http://lesoptions.com/

President

Monetis Financial Corporation

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.

354 posts
0 comments

Leave a Reply

Your email address will not be published. Required fields are marked *