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Investing with options - UBS Group earnings opportunities
Koen Hoorelbeke
Investment and Options Strategist
Résumé: UBS Group, the Swiss multinational investment bank and financial services company, is scheduled to release its earnings report on Thursday, August 31st, before market open. In this article, we'll look at the specifics of various options strategies for UBS investors, including covered calls and other long term opportunities. These strategies could provide traders and investors ways to capitalize on the upcoming earnings announcement, whether they have a bullish or bearish stance on UBS.
Investing with options - UBS Group earnings opportunities
UBS Group, the Swiss multinational investment bank and financial services company, is scheduled to release its earnings report on Thursday, August 31st, before market open.
The earnings report will be closely watched by investors as they assess the company's financial performance and outlook. Will UBS test the 2015 highs and jump over it, or will it consolidate and retreat. Being informed with the strategies in this articles you will be better prepared for any situation that arises.
In this article, we'll look at the specifics of various options strategies for UBS investors, including covered calls and other long term opportunities. These strategies could provide traders and investors ways to capitalize on the upcoming earnings announcement, whether they have a bullish or bearish stance on UBS. Let's get started.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
1. Covered Call
The first strategy which we're going to cover is a covered call. For those investors who already own UBS-shares, this could be an extra yield on an existing position. This covered call in particular is not for all UBS share-owners. It's a trade setup for those who are bullish on UBS on the longer-term, but who believe that the price will accumulate/settle at it's current level for a couple of weeks and only after that will make a significant move (up or down).
1. Underlying Asset: The underlying asset for this trade is UBS Group (ticker: UBSG:xvtx). The price of UBSG at the moment of writing was CHF 21.870 (Tuesday, August 29, 2023).
2. Covered Call Strategy: The strategy involves selling a call option while owning the underlying asset, known as a covered call strategy. The goal is to generate income from the premium received from selling the call while potentially selling the stock if the price rises above the strike price.
3. Option Details: The call option being sold has a strike price of CHF 23 and expires on September 15th, 2023. This means that if UBS's price is above CHF 23 on the expiration date, the option can be exercised, and you would have to sell your UBS shares for CHF 23,- each. However, if you don't want to sell your shares and the price is above the strike price as the expiration date approaches, you have the option to "roll" your position, which involves buying back the current call option and selling another one with a later expiration date and possibly a higher strike price. This can generate additional premium income and give the stock more time to potentially increase in value.
4. Premium: The premium received from selling the call option is CHF 0.33 per share or CHF 33,- per contract (which corresponds to 100 shares). This is the income generated from the trade, which you get to keep regardless of what happens with UBS's price.
5. Breakeven Point: The breakeven point for this trade is the stock price less the premium received. So, it's CHF 21.87 - CHF 0.33 = CHF 21.54. If UBS's price is above this level at expiration, the trade will be profitable.
6. Risk: The maximum risk in a covered call strategy is if the stock price falls significantly. However, the premium received from selling the call option provides some downside protection.
7. Calculating the yield:
1. Capital invested: The capital invested in the underlying shares is the price of the shares multiplied by the number of shares. In the case of 1 call contract, it's 100 shares at CHF 21.870 each, so the capital invested is CHF 2187,-.
2. Yield: The yield is the premium received divided by the capital invested. In this case, it's CHF 33 / CHF 2187 = 1.51%.
However, this is the yield for the 17-day period until the option's expiration. If you want to annualize this yield to compare it with other annual returns, you can do so as follows:
Annualized Yield: To annualize the yield, you first calculate the number of 17-day periods in a year, which is 365 / 17 = 21.47 periods. Then, you multiply the yield for one period by the number of periods in a year. So, the annualized yield is 1.51% * 21.47 = 32.92%.
So, the yield for this covered call strategy is 1.51% for the 17-day period, or 32.92% on an annualized basis.
Please note:
- This is a simplified calculation and actual results can vary based on a variety of factors.
- Selling covered calls can generate income, but it also caps your upside potential because you may have to sell your stock if its price rises above the strike price. It's important to be comfortable with this trade-off before implementing a covered call strategy.
- If you possess a definitive outlook on the trajectory that UBS will take, initiating a trade before the earnings announcement could be a profitable move. This is due to the heightened implied volatility, which results in a higher premium to collect. However, if you're uncertain, it might be prudent to hold off until just after the earnings are released and then contemplate new strike levels. While you may lose some options value due to the volatility slump, if UBS experiences a significant "gap-up", you could find yourself in a more secure position.
2. Cash secured put
Selling a cash secured put is actually not an "investment" strategy, but rather a way of acquiring stock with a "reduction". This strategy involves selling a put option on UBS with a strike price that's currently in-the-money (ITM). Let's consider the specific example of the put option expiring on September 15th 2023, with a strike price of CHF 23. With UBS trading at 21.87 (at the moment of writing), this put is ITM.
Selling this put option would involve receiving an upfront premium of CHF 1.42 per share, providing an immediate return on your capital. In addition, since this is a cash-secured put, you would set aside the necessary funds to buy 100 shares of UBS at the strike price (23), if assigned.
Here's where the strategy becomes particularly interesting. If UBS's stock price remains above the strike price of CHF 23 at expiration, the put option would expire worthless, and you would keep the entire premium as profit. However, if UBS's price drops below 23, you would be obligated to purchase the shares at the strike price. But remember, you already received a premium of 1.42 per share, effectively reducing your purchase cost to 21.58 per share (23 strike - 1.42 premium). This results in acquiring UBS stock at a discount to its current trading price (21.87).
This approach serves two purposes: providing immediate income through the premium and potentially setting you up to acquire UBS shares at a price lower than the current market rate. However, it's important to understand that selling an ITM put comes with the risk of being assigned before expiration, given that the option is already ITM. But for those bullish on UBS over the long term, this might be seen as a win-win scenario: either keep the premium if the option expires worthless or acquire UBS shares at a discounted rate.
Some remarks:
- Make sure you have enough cash available on your account on the day of expiration. If you do not have enough cash at hand, the close-out procedure that Saxo has in place to protect you from going negative, will close your put-option (if the option is ITM), which is, in this case, exactly the opposite of what you're trying to achieve
- As you can see in the example above: the expiration date is as close as possible. The goal is to acquire stock. The further you go with your expiration date, the longer you will have to wait before you are assigned (unless you get an early assignment, but that's unpredictable)
3. Buying long calls
Another investment strategy to consider for UBS is purchasing a long call option. By doing so, you gain the right to buy UBS shares at a fixed price (the strike price) within a certain timeframe. Consider the specific example of buying a long call with a strike price of CHF 20, expiring on June 21st, 2024.
For this privilege, you pay an upfront premium (debit) of CHF 3.35 per share, which equates to a total investment of CHF 335.00 for one contract (remember, each options contract controls 100 shares). With UBS trading at 21.870 (at the moment of writing), this option is in-the-money, meaning that the strike price is less than the current stock price.
Buying a long call could potentially offer significant upside potential. If UBS's stock price rises above the strike price plus the cost of the premium (in this case, CHF 20 + 3.35 = 23.35), you'll start to see profits. The further UBS's stock price climbs, the greater your profits could be.
However, it's crucial to remember the risk involved. The maximum risk in buying a long call option is the premium paid. If UBS's stock price remains below the breakeven point (23.35 in this case) at expiration, the call option will expire worthless, and your entire investment (the premium paid) would be lost.
Buying a long call is an inherently bullish strategy, and is ideal for investors who are optimistic about UBS's potential for price appreciation over the next 297 days. It allows you to control a large amount of stock for a fraction of the cost of owning it, but this comes with increased risk compared to owning the stock outright. Therefore, it's important to thoroughly evaluate your personal risk tolerance and financial situation before choosing this strategy.
4. Buying long puts
If you believe that the UBS stock might go lower in the coming weeks after the earnings release, you might consider buying a put. By doing so, you gain the right to sell UBS shares at a fixed price (the strike price) within a certain timeframe (the expiry date). Consider the specific example of buying a put with a strike price of CHF 23, expiring on October 20th, 2023 (in 52 days).
For this privilege, you pay an upfront premium (debit) of CHF 1.71 per share, which equates to a total investment of CHF 171.00 for one contract (remember, each options contract controls 100 shares). With UBS trading at 21.870 (at the moment of writing), this option is in-the-money, meaning that the strike price is bigger than the current stock price.
Buying a long put could potentially offer significant upside potential. If UBS's stock price drops below the strike price minus the cost of the premium (in this case, CHF 23 - 1.71 = 21.29), you'll start to see profits. The further UBS's stock price drops, the greater your profits could be.
However, it's crucial to remember the risk involved. The maximum risk in buying a long put option is the premium paid. If UBS's stock price remains above the breakeven point (21.29 in this case) at expiration, the put option will expire worthless, and your entire investment (the premium paid) would be lost.
Buying a long put is an inherently bearish strategy, and is ideal for investors who are pessimistic about UBS's potential for price appreciation over the next 52 days. It allows you to control a large amount of stock for a fraction of the cost of owning it, but this comes with increased risk compared to owning the stock outright. Therefore, it's important to thoroughly evaluate your personal risk tolerance and financial situation before choosing this strategy.
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Remember, with options, it's not about betting on the future, but rather strategizing for it.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.