Helping investors by protecting bank stocks with options

When The Australian Financial Review reported a Citi “sell” call on major banking stocks it noted the big four bank valuations were “stretched” and their return on equity was not what it used to be. 

But the publication also noted that if you are a financial adviser or running a big Australian share fund, you cannot just drop the banks from your portfolio. The big four alone account for nearly 30 per cent of the local index. 

For Advisers using AUSIEX the big four are very much mainstays of accounts, with stalwart Commonwealth Bank of Australian (ASX:CBA) for example being held in over 30% of advised accounts, and making up 42% of all adviser holdings in Big 4 stocks.

Table 1: Advised ‘Big 4’ Holdings

Stock Code % of Total Accounts Holding % of Total 'Big 4' Holdings
CBA 30.6% 42.94%
WBC 28.1% 19.05%
NAB 26.9% 21.32%
ANZ 25.2% 16.69%

Getting practical with Options

As an alternative to incurring the cost of selling out the of Big 4 bank stocks and unwinding likely long term investments all with potential capital gains tax (CGT) implications, there is a way to help investors protect their bank stocks holdings – and the important dividend income they provide – by using options, suggests Lewis Taie, Senior Manager of AUSIEX's Derivatives Program.

He notes that over the first quarter of this year, AUSIEX has witnessed the put/call ratio of short-dated big four banks' options heavily weighted to calls with around 1.6 calls open for every put and net calls materially short. Longer dated options are however weighted towards puts with 2.1 puts open for every call and net puts materially long.

“This suggests that managers, advisers and investors may be protecting the long-term value of their equity holdings – or seeking downside exposure – and funding these puts with short calls that are rolled on an ongoing basis,” Taie says.

HNWI activity

In the wholesale, financial advice and high net worth investor market, activity has potentially been driven by concerns around bank stocks in the medium term and advisers not wishing to realise significant capital gains in selling bank shares. 

This has seen an increase in long put options that can offset losses should the underlying shares pull back. 

Taie says the buyer of a put is able to secure their sell price should the stock pull back, though is required to pay the premium for the benefit. 

The bought put can be funded with a sold call, where the seller of a call receives the option premium though is obligated to deliver the stock if the stock price closes above the strike price. In doing so they cap their upside, securing an exit price should prices remain resilient, and the position expires ‘in the money’.

Acquisition of these contracts provide significant flexibility to investors, better enabling them to enter or in this case exit their positions. 


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